Why Did the United Natural Foods (UNFI) Earnings Report Leave Investors Hungry? WFM, HAIN & BNNY

Natural and organics food stock United Natural Foods, Inc (NASDAQ: UNFI) fell 8.09% after reporting earnings, meaning its worth taking a closer look at those earnings as well as the performance of Whole Foods Market, Inc (NASDAQ: WFM), The Hain Celestial Group, Inc (NASDAQ: HAIN) and Annies Inc (NYSE: BNNY) as stocks in the sector have been trending down lately while competition in the space has increased.

What is United Natural Foods, Inc?

United Natural Foods is the leading independent national distributor of natural, organic and specialty foods and related products including nutritional supplements, personal care items and organic produce – carrying and distributing more than 65,000 products to more than 31,000 customer locations throughout the United States and Canada. The company serves a wide variety of retail formats including conventional supermarket chains, natural product superstores, independent retail operators and the food service channel.

As for potential peers or performance benchmarks in the natural and organics space, large cap Whole Foods Market, Inc is now a leading retailer of natural and organic foods with 374 stores in the United States, Canada and the United Kingdom; midcap Hain Celestial Group, Inc is a natural and organic food and personal care products company in North America and Europe that participates in almost all natural food categories; small cap Annies Inc is a natural and organic food company with over 125 products and a presence in over 25,000 retail locations in the United States and Canada.

What You Need to Know or Be Warned About United Natural Foods, Inc

On Tuesday after the market closed, United Natural Foods reported results for the third quarter of fiscal 2014 ended May 3, 2014. Net sales increased 13.8% to $1.78 billion, gross margin was 16.7% verses 16.8% (it was negatively impacted primarily by foreign exchange from the declining value of the Canadian dollar) and net income increased 15.1% to $36.4 million or $0.73 per diluted share from $31.6 million or $0.64 per diluted share for the third quarter of fiscal 2013.   

These results were pretty much inline with expectations but the updated full-year profit forecast fell short of Wall Street expectations. United Natural Foods now projects this year's profit to be between $2.47 and $2.50 a share whereas in March, it projected profit of $2.45 to $2.51 a share with analysts expecting $2.51 for the year.

In the earnings call (the transcript is available on Seeking Alpha here), the CEO commented:

Given the growth in our space, competition has also increased. Conventional food distributors and continued movement to direct distribution by supermarkets for fast moving products will pressure our growth as the industry expands.

However, in our commitment to new distribution centers and our ability to sell the entire store, we're well prepared for new competition.

And in the Q&A, several questions were asked about the competition with the answers being:

Some of the traditional conventional food distributors at over the last couple of years have added quite a bit of natural organics…. And turning with the acquisition of Tony's and really building out our product offerings so that it truly is distinctive, it's a terrific hedge again kind of competition that we've seen coming in for the space.

And:

It's firstly all on price, because they don't have a differentiated product line it's a pretty narrow group of products that they coming to market with. And typically their distribution programs and to be less than ours become, because they are coming to the store with full truck or virtually a full truck with conventional product and so the distribution model itself is much more efficient for them to carry along the mark. And so it's really nothing new, but I think it's an important point to make. So it hasn't affect us, affected us in a significant way when looking at this year versus last year, but I think it was just an important commentary to make that, we're not the only one it's out there, there are other people that are coming into the space to compete on the fast moving items.

And:

There is no body that I know of, that has a full offering of natural organic ethnic gourmet and perishable protein and specialty cheese. There are distributors in the market that may carry portion some of that product offering, but there is no one that I know of that can deliver the store in its entirety.

Otherwise, it should be mentioned that United Natural Foods has a trailing P/E of 26.28 and a forward P/E of 22.06 – meaning its not exactly a bargain. Then again, that's a bit better than Whole Foods Market's trailing P/E of 28.07 and forward P/E of 24.34; Hain Celestial Group's trailing P/E of 33.72 and forward P/E of 23.87; and Annies Inc's trailing P/E of 35.41 and forward PE of 27.58.

Share Performance: United Natural Foods, Inc vs. WFM, HAIN & BNNY

United Natural Foods fell 8.09% to $62.96 (UNFI has a 52 week trading range of $51.50 to $79.64 a share) for a market cap of $3.12 billion plus the stock is down 16.7% since the start of the year, up 21.2% over the past year and up 139.1% over the past five years. Here is a look at the performance of United Natural Foods verses that of Whole Foods Market, The Hain Celestial Group and Annies Inc:

As you can see from the above chart, natural and organic food stocks have all have been steady risers – up until recently.

Finally, here is a look at the latest technical charts for United Natural Foods, Whole Foods Market, The Hain Celestial Group and Annies Inc:

The Bottom Line. Natural and organic food stocks in general do seem to be caught in a downtrend, meaning it may still not be the right time to get into United Natural Foods if you aren't already. It might be wise to sit on the sidelines for awhile to see if those somewhat high P/Es come down a bit more.