RBC Keeps United Natural Foods (UNFI) at 'Sector Perform' Following Q1 Report; Notes Cloudier Visibility

RBC Capital reaffirms United Natural Foods (Nasdaq: UNFI) at Sector Perform with a price target of $34 following Q1 results issued yesterday.

Following: 1) an earnings miss; 2) the largest EBIT margin contraction in three quarters; 3) an organic growth deceleration; 4) less visibility into fundamentals; and 5) category weakness, we remain on the sidelines. We are lowering our FY17 numbers and worry that, absent unannounced acquisitions, FY17 guidance carries downside risk.

Much like Natural/Organic's evolution into mainstream grocers, we believe UNFI is transitioning from a business that can command premium margins to a more conventional margin model. As Natural/Organic offerings become more pervasive and a strategically imperative traffic-driver, retailers will increasingly compete on price, and margins for the system will have to decrease. Gross margins to UNFI’s conventional customers (25% of sales) should remain pressured. In the near term, Ahold/Delhaize negotiations present a potential margin contraction catalyst. Once the segment has more competitive margins, UNFI would likely regain access category-like growth and command a valuation premium to a conventional distributor (~6x EV/NTM EBITDA).

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