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United Natural Foods (UNFI) PT Cut to $40 at BMO Capital Following Disappointing Q1

December 8, 2015 11:10 AM EST
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Price: $11.49 -3.2%

Rating Summary:
    8 Buy, 23 Hold, 7 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 13 | Down: 11 | New: 11
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BMO Capital maintained a Market Perform rating on United Natural Foods (NASDAQ: UNFI), and cut the price target to $40.00 (from $52.00), following the company's 1Q earnings report. UNFI’s earnings came in below expectations. A deceleration of organic growth and a cautious tone on GM%, are some of several challenges that contributed to the disappointing quarter.

Analyst Kelly Bania commented, "UNFI’s F1Q16 earnings were below expectations, marked by several challenges, namely a deceleration of organic growth (ex-Albertsons to +6.8% in F1Q16 vs+8.4% QTD trends in September) and a cautious tone on GM%. The quarter was also impacted by bad debt expense related to a customer bankruptcy – which weighed F1Q EPS by $0.02/op margins by (9)bps. The 89bps decline in GM% was driven by FX (7bps) and lower fuel surcharges (15)bps with the remaining 67bps from both reduced promotional spend & core-underlying GM% contraction due toongoing customer mix-shift (not necessarily split equally). We believe this quarter also highlights the near-term challenge that UNFI faces as competition has clearly increased for center-store natural & organics products (particularly from private label) and the company’s need to transition towards the higher-growth/more differentiated perimeter categories (natural protein growth >15% in the quarter). However, with a $1.3bn business in fresh (Tony’s + Albert's) and a small ethnic/gourmet business currently, we believe it will take time for UNFI move theneedle in perimeter categories, absent M&A, where the company remains highlyfocused. While F1Q16 was challenging, the company’s outlook still implies solidorganic growth (ex-Albertsons) of +7.5-9.5% and current trends are “well within”that range. UNFI also called out contract renewals for Kroger, Ahold, Delhaize, andNational Co-Op Grocers totaling $785mm (WFM contract was also recentlyextended thru 2025), which supports the top-line outlook, but likely at a lowerGM%. We lower our F2016E EPS to $2.82 (from $2.93 prior) and F2017E EPS to $3.08 (from $3.27) implying +9% YoY growth. We lower our target price to $40from $52 based on 14x (vs 16x prior) our revised F2017E EPS. Our revised target price implies ~7x EV/EBITDA on our F2017 EBITDA forecast."

For an analyst ratings summary and ratings history on United Natural Foods click here. For more ratings news on United Natural Foods click here.

Shares of United Natural Foods closed at $44.03 yesterday.



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