The results are in for FY20 for United Natural Foods (NYSE:UNFI), and the highlights are pretty amazing (from press release):
- Reduced outstanding debt, net of cash, by $388 million; year-end adjusted EBITDA leverage ratio of 4.0x
- Net sales increased to $26.5 billion
- Adjusted EBITDA increased to $673 million
- Adjusted EPS increased to $2.72
Despite beating earnings and revenue estimates, and raising FY21 guidance, the stock has sold off over 20%. Some are attributing this to the CEO’s retirement announcement, but given the nine-month timetable on that decision, the explanation leaves investors wanting more. No UNFI thesis on Seeking Alpha has referenced the management team as a company strength, and if anything, the mistakes and debt burden from the Supervalu acquisition are a reminder of the team’s missteps.
Possible other explanations:
- Q4 cash generation fell short of investor expectations
- Relatively significant number of shares (~2m) granted to management, diluting investors
- Lack of CEO successor
- Lack of Whole Foods contract extension
- Margin pressure on FY21 revenue
While all of these could be part of the story, I still don’t see it. It is true that management expects Q3/Q4 21 to be tough comps Y/Y, but the fact it continues to guide above expectations for revenue and EBITDA after a blowout year shouldn’t be taken for granted. It has a good track record of setting reasonable guidance it can beat, which is even more encouraging.
Regarding the Whole Foods contract, the last extension was announced Nov 2nd, 2015. I expect a similar announcement in the coming couple quarters, removing a significant overhang from the stock.
Updating the valuation waterfall, I’ve included company guidance for FY21, assuming cash balance and market cap at current levels, and showing debt paydown of $310 which reflects EBITDA midpoint of $710m, less $225m for CapEx and