UNFI 4Q21 Earnings 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

• 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

• 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

• Not going through with divestitures of retail business

• New CEO yet to prove himself

Financial Analysis:

• Revenues of $6.7 billion in 4Q21 down 0.5% from 4Q20

• Revenues of $26.9 billion in FY21 up from 26.5 billion in FY20 (ended in July 2020) and $8.4 billion in FY16

• Net income of $43 million in 4Q21 vs $52.3 million in 4Q20

• Net income of $149 million in FY21 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 $304 million vs $284 million for FY20 (excluding $102 million in divestitures from sales of retail stores)

• Balance Sheet

  • Total assets: $7.52 billion ; total liabilities: $6.01 billion; book value: $1.51 billion

  • Cash: $41 million, debts: $2.17 billion, current assets: $3.55 million, current liabilities: $2.48 billion

Valuations

• My personal Biases:

  • Bullish on industry

  • Belief in ability to repay debt with divestitures

  • Largest position of my portfolio at 11.3%

• Assumptions for base case:

  • Use Discounted Owner’s earnings to calculate intrinsic value

  • Revenue growth of 4% per year (as per forecast)

  • Earnings Growth of 16% per year (as per forecast)

  • 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%

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• Bull case with extra 10% extra Owner’s earnings in 2026 compared to base

• Bear case with 10% less owner’s earning in 2026 compared to base

• Shares outstanding grow from 59 million to 70 million

Conclusion

• Undervalued but not with margin of safety

• 8% expected returns per year

Full research and analysis: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/35285550