UNFI 3Q21 Earnings Analysis


UNFI Stock Analysis

Business Description:

  • $140 billion potential market with currently $27 billion market and $38 billion existing customer opportunity

  • Major Competitors: SpartanNash (NASDAQ:SPTN), C&S Wholesales Groger and Kehe

  • Minor competitors (serves mostly to restaurants, schools and other small units): Sysco (NYSE:SYY) and US Food Holdings (NYSE:USFD)

  • Over 60 distribution centers (total 28.8 million sq ft) vs 19 for SPTN (8.2 million sq ft)

  • Diversified with moat in fast growing natural and organic

UNFI Stock Analysis
  • Customers:

  • Chains

  • Independent retailers

  • supernatural

  • retail

  • Largest customer: Whole Foods with about 18% of revenues in 2020

  • 6 product categories:

  • Grocery and general merchandise

  • Produce

  • Perishables and frozen foods

  • Nutritional supplements and sports nutrition

  • Bulk and food service products

  • Personal care items

  • 2 business segments

  • Wholesale

  • Retail


Catalysts:

  • Changing consumer habits into natural and organic

  • Deal with Amazon extended till 2027

  • Divestiture of retail business to raise capital for debt repayment

  • Inflation is a tailwind


Risks:

  • Took high debt for Supervalu acquisition with high interest payments

  • Depends on derivatives to handle debt repayments at lower interest rates

  • Unionized workers and high pension expenses


Financial Analysis:

  • Revenues of $6.62 billion in 3Q21 down 5.3% from 3Q20

  • Revenues of $27.8 billion in TTM up from 26.5 billion in FY20 (ended in July 2020) and $8.4 billion in FY16

  • Adjusted EBITDA of $206 million in 2Q21 up 54% from 2Q20

  • Net income of $48.5 million in 3Q21 vs $88.1 million in 3Q20 (net tax benefits of $18 million compared to 3Q21)

  • Net income of $198 million in TTM vs net loss of $254 million for FY20

  • Net loss in FY19 and FY20 mostly because of impairment of goodwill of $293 million and $495 million respectively, after the Supervalu acquisition

  • FCF of $117 million vs $284 million for FY20 (excluding $102 million in divestitures from sales of retail stores)

  • Owner’s earnings (including divestitures as they offset interest payments to bondholders) of $219 million in TTM vs $382 million in FY20

  • Net debt repayment of $62 million in 3Q21

  • Balance Sheet

  • Total assets: $7.52 billion ; total liabilities: $6.21 billion; book value: $1.30 billion

  • Cash: $39 million, debts: $2.33 billion, current assets: $3.58 million, current liabilities: $2.26 billion

UNFI Stock Analysis

Valuations

  • My personal Biases:

  • Bullish on industry

  • Belief in ability to repay debt with divestitures

  • Largest position of my portfolio at 7.0%

  • Assumptions for base case:

  • Use Discounted Owner’s earnings to calculate intrinsic value

  • $100 million in divestitures in 2022 and 2023 each

  • Revenue growth of 4% per year

  • Profit margins of 1.5% in the long-term (2021 and 2022 lower with synergy costs)

  • Depreciations of $300 million per year and Capex of $250 million per year

  • All of owner’s earnings used to repay debt

  • Discount Rate of 15% till 2026

  • Terminal Growth rate of 2%

UNFI Stock Analysis
  • Bull case with extra 10% extra revenues in 2026 compared to base

  • Bear case with 10% less revenues in 2026 compared to base

  • Shares outstanding grow from 59 million to 70 million

UNFI Stock Analysis

Conclusion

  • Undervalued even with 50% margin of safety

  • 13% expected returns per year

Full analysis on my Research Partnership: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/32922580

UNFI Stock Analysis

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