2 Views on United Natural Foods Losing Albertsons

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United Natural Foods Inc. (NASDAQ: UNFI) had been a great growth story in the growth of organic, natural and specialty foods. But lately it has run into issues, and the latest news that its contract as a distributor to Albertsons was terminated is taking a toll on the stock.

The Albertsons loss means that United Natural Foods is losing its distribution into the Albertsons stores and the Safeway and Eastern Supermarket chains. That pact will now terminate on September 20, 2015, rather than the original ending date of July 31, 2016.

Revenue from Albertsons is expected to be approximately $410 million for 2015, versus consensus estimates from Thomson Reuters of a total of $8.2 billion in revenue. While the company does not expect a hit to fourth-quarter financial or fiscal 2015 guidance, that is of little comfort for 2016 and beyond.

24/7 Wall St. has tracked two analyst reactions to the news. Oppenheimer downgraded the stock and Canaccord Genuity maintained its Buy rating.

Canaccord Genuity’s Scott Van Winkle and Mark Sigal maintained their Buy rating, but they lowered their target price to $65 from $71. They noted that the Albertsons loss should shave about 5% off of estimates. The analysts said:

The loss of the Albertsons business comes on the heels of softer channel growth, which will undoubtedly shake investor confidence and impact valuation. The Albertsons loss is a reversal of fortune, as UNFI won the business 4 years ago and was clearly underbid by the former contract servicer who we suspect had more incentive to be aggressive with pricing. The recent win of $100 million in incremental business that began shipping a couple of weeks ago, is now not incremental, but rather a partial offset to the Albertsons loss.

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Oppenheimer’s Rupesh Parikh believes that the near-term outlook is now even more challenging, which prompted a downgrade to Perform from Outperform. Parikh also cut the price target to $60 from $70 in his call.

The Oppenheimer report said:

Last night, United Natural Foods announced the termination of the Albertsons Companies, Inc. contract and its roughly $400 million in sales. We have maintained a cautious near term stance toward United Natural Foods shares lately based on our view of aggressive street earnings expectations and an ongoing channel shift away from United Natural Foods’ customer base.

Oppenheimer believes that the upcoming fiscal year will be one of transition, which likely will bring sluggish organic sales growth. Still, the firm remains optimistic that United Natural Foods has the ability to manage through its business challenges on a long-term basis. Unfortunately, it expects the stock to be range-bound in the near term.

United Natural Foods shares were down 14.6% at $53.40 in late morning trading Tuesday. The new 52-week range, after a new low on Tuesday, is $52.28 to $83.91. Its market cap is now $2.67 billion, and the consensus price target before the coming cuts was listed as $71.65.

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