R-E-L-A-X BEST IDEA: LONG UNITED NATURAL FOODS, INC. (UNFI)

Transcription

1 HOWARD PENNEY SHAYNE LAIDLAW R-E-L-A-X BEST IDEA: LONG UNITED NATURAL FOODS, INC. (UNFI) September 11, 2015 HEDGEYE 1

2 DISCLAIMER DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more details please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at HEDGEYE 2

3 PLEASE SUBMIT QUESTIONS TO HEDGEYE 3

4 HEDGEYE CONSUMER STAPLES IDEAS LIST LONG LIST TRADE TREND TAIL SHORT LIST TRADE TREND TAIL GIS General Mills - HAIN Hain Celestial - X X WWAV WhiteWave Foods LNCE Snyder's-Lance UNFI United Natural Foods LONG BENCH SHORT BENCH DMND Diamond Foods BETR Amplify Snack Brands LWAY Lifeway Foods JJSF J&J Snack Foods PEP PepsiCo K Kellogg's HSY The Hershey Co. Bench = timing is not right, or research is in progress. HEDGEYE 4

5 KEY POINTS DOMINATING COMPANY WITH ORGANIC GROWTH UNFI is one of the best positioned company s in the consumer staples space to take advantage of the growth in the natural and organic market. Importantly, there is an increasing number of not only consumers but retailers that are demanding these products. UNFI effectively operates in a duopoly and is more than 2.5x the size of the nearest competitor. As the market opportunity grows for UNFI, so does the need for the companies value added services. IMPROVING FINANCIAL PICTURE CREATES M&A OPPORTUNITY The loss of the Albertsons business will prove to be a watershed for the company and a great opportunity for investors to buy the stock. The company is positioned (and now motivated) to capitalize on the significant investments they have made in the business over the past two years. M&A will play a big part in not only gaining back the lost business but growing beyond that as well. RISKS ARE OVERBLOWN Trading at an 11% discount to SYY, there is significant skepticism over the future of this company. We believe that skepticism is unwarranted and provides a great opportunity. As we get past all the hype, the multiple will improve and the real organic growth of the company will prevail. Data Source: Company Filings, FactSet, Hedgeye Estimates. HEDGEYE 5

6 EXECUTIVE SUMMARY

7 COMPANY OVERVIEW Company Overview Management Team United Natural Foods Inc. (UNFI) is a distributor of natural, organic and specialty foods and related products throughout the United States and Canada Operations are broken down into three segments: 1. Wholesale Division Broadline distribution business, organized into three regions Eastern, Western and Canadian. This is the bulk of the business and the only reportable segment 2. Retail Division UNFI operates 12 natural product retail stores through Earth Origins within the U.S. nine of which are located in FL, two in MD, and one in MA. Enables UNFI to see market trends first hand, and they obviously have significant economies of scale when it comes to freight and purchasing Steven Spinner President and Chief Executive Officer Prior to joining UNFI in 2008, Steven was the CEO of Performance Food Group Co. (PFG) Mark Shamber SVP, Chief Financial Officer and Treasurer Has served in various finance based roles in the company for the last decade, previously worked at E&Y Joseph Traficanti SVP, General Counsel, Chief Compliance Officer and Corporate Secretary Prior to joining UNFI in 2009, Joseph served in a similar role for PFG Sean Griffin Chief Operating Officer Joined UNFI in 2008, has worked for PFG, Sysco, U.S. Foodservice and Alliant 3. Manufacturing & Branded Products Division Subsidiary, Woodstock Farms Manufacturing, specializes in international importation, roasting, packing and distribution of nuts, dried fruit, seeds and other natural and organic snacks. These items are sold through bulk and private label arrangements with retailers of all sorts Since fiscal year 2000, UNFI has successfully closed 15 acquisitions of distributors, manufacturers and suppliers. Management has stated that they will continue to grow in part through M&A Data Source: Company filings. Eric Dorne SVP, Chief Information Officer Prior to joining UNFI in 2011 he served as the CIO for The Great Atlantic & Pacific Tea Co., parent company of A&P, Pathmark, SuperFresh etc. Thomas Dziki SVP, Chief Human Resources and Sustainability officer Joined UNFI in 2002, and has spent time across the organization, prior to joining UNFI he worked as a consultant to the business HEDGEYE 7

8 REVENUE BY CUSTOMER Other 5% Conventional supermarkets and mass market chains 26% Independently owned natural products retailers 33% Supernatural chains 36% Total 2014 Revenue: $6,794mm Data Source: Company filings. HEDGEYE 8

9 FINANCIAL SUMMARY ($ in millions except per share information) Last Price (as of 9/9/2015) $49.60 % of 52 week high 59% Shares Outstanding 50 Market Capitalization $2,484 - Cash $23 + Debt $549 + Minority Interest $0 Enterprise Value $3,010 Fiscal Year End August 2, E Revenue $5,236 $6,063 $6,794 $8,195 Growth (%) 15.8% 12.1% 20.6% Gross Margin $916 $1,024 $1,127 $1,282 Margin(%) 17.5% 16.9% 16.6% 15.6% Growth (%) 11.8% 10.1% 13.7% Operating Profit $162 $186 $210 $248 Margin(%) 3.1% 3.1% 3.1% 3.0% Growth (%) 14.7% 13.2% 17.9% EPS $1.94 $2.19 $2.51 $2.86 Growth (%) 12.6% 14.8% 13.9% Data Source: Company Filings, Consensus Metrix, FactSet, Hedgeye. HEDGEYE 9

10 RECENT PERFORMANCE

11 PRICE HAS DROPPED CONSIDERABLY UNFI shares are trading 40% below their 52-week high and down 23% for the total period /09/14 10/09/14 11/09/14 12/09/14 01/09/15 02/09/15 03/09/15 04/09/15 05/09/15 06/09/15 07/09/15 08/09/15 09/09/15 (INDEX) UNFI (INDEX) S&P 500 Data Source: FactSet, updated on 9/9/15. HEDGEYE 11

12 INDUSTRY OVERVIEW

13 GROWTH IN NATURAL & ORGANIC PRODUCTS CATEGORY GROWTH OF THE OVERALL FOOD INDUSTRY MAY BE SLOWING, BUT NATURAL AND ORGANIC IS STILL GROWING AND STEALING SHELF SPACE ACROSS THE INDUSTRY $38.9B $4.8 $1.8 $42.9B $5.3 $2.0 $47.3B $5.8 $2.2 $32.3 $35.6 $ Weeks (ending ) 52 Weeks (ending ) 52 Weeks (ending ) Conventional Specialty Natural Data Source: SPINSscan Natural, SPINSscan Gourmet, SPINSscan Conventional Multi-Outlet, 52 weeks ending 7/12/15 vs. year ago. HEDGEYE 13

14 NATURAL & ORGANIC FOOD CATEGORY MACRO OVERVIEW How UNFI works within the industry Said best by the UNFI CEO UNFI is the largest consolidator of slow moving natural & organic products in the country. UNFI is to Natural & Organic what Sysco is to traditional foodservice Distributors are used by retailers to consolidated slow moving products throughout the store, additionally premium distributors such as UNFI work on the perimeter of the store, where there is higher velocity but their scale and service level provides the retailer great value From a food manufacturer perspective, the advantage of shipping through a distributor versus direct to retailer is you save time and money by not worrying about the slow moving items, distributors are a must for smaller companies that are unable to financial support their own system Bottom line is when you want to ship to the center of the store at Whole Foods, you go through UNFI Data Source: Company Filings, Hedgeye Assumptions. Who uses UNFI? Food manufacturers benefit from distributors in the case of slower moving SKU s or if they are too small to run their own distribution system cost effectively (only select companies shown below) In FY2014 UNFI served more than 40,000 customer locations HEDGEYE 14

15 COMPETITIVE LANDSCAPE

16 HEATED BATTLE TO MEET DEMAND Distributor Competition Retailers are Growing Natural & Organic Shelf Space UNFI & KeHE sit at the top amongst themselves when it comes to Natural & Organic product distribution. UNFI remains the biggest player with about a 12% market share in the natural and organic space, which from company estimates is still only 5% of total food sold at retail UNFI KeHE Kroger: The number of natural and organic items continues to grow in the entire store more customers are choosing to live that lifestyle and eat and want those products. It s a lifestyle, not necessarily a demographic play. Natural and Organic is growing in the teens Deli (i.e. perimeter of store) also showing strong growth Sales $8.2bn ~$3.5bn Distribution Centers Suppliers 6,000 3,500 Offerings Differentiator Data Source: Company Filings, Hedgeye Estimates. Similar UNFI is a price leader in the category but refuses to make irrational business deals There is room for both of these competitors in the space, but we firmly believe that UNFI has the better opportunity to take advantage of the growing marketplace This is just one public company example, but we do store walks on a consistent basis, and it is clear that over the last two to three years more stores are dedicating aisles to natural and organic not just shelves. Note from UNFI on Captive distribution: Only 25% of our business has a captive option, right, the rest doesn t this speaks to UNFI s ability to capture this new shelf space and be the main supplier for even more of its customers HEDGEYE 16

17 WHOLE FOODS MARKET (WFM) WFM IS NOT DEAD Relationship with UNFI WFM represents roughly ~36% of total revenue for UNFI UNFI has been the primary distributor for WFM for 16 years, their current agreement does not expire until September 25, 2020 WFM Growth Strategy 7% 6% 5% 4% 3% 2% 1% 0% Same-Store Sales Growth 5.4% 4.5% 4.5% 3.9% 3.6% 3.1% 2.8% 2.2% 1.3% 1.4% 0.9% Q1 '14A Q2 '14A Q3 '14A Q4 '14A Q1 '15A Q2 '15A Q3 '15A Q4 '15E Q1 '16E Q2 '16E Q3 '16E New store concept called 365 by Whole Foods Market will help expand the growth potential for WFM Right now they are slotted to open five 365 stores in the 2H of CY16 in Los Angeles, Santa Monica, Portland, Houston and Bellevue Expecting to cross the 500 total store mark in FY17 Line of sight to 1,200 stores in the United States longer term Management has been investing in price relevancy and technology to regain sales momentum Yes growth is slowing but they are still opening new doors albeit at a slower pace than before, that is what is most important for UNFI Q1 '14A Q2 '14A 386 Q3 '14A 399 Q4 '14A WFM SSS Average LTM Unit Growth 408 Q1 '15A Q2 '15A Q3 '15A Q4 '15E # of Stores YoY Growth Q1 '16E Q2 '16E 458 Q3 '16E 14% 12% 10% 8% 6% 4% 2% 0% Data Source: Company Filings, Consensus Metrix, Hedgeye. HEDGEYE 17

18 UNFI BUSINESS OVERVIEW

19 UNFI BUSINESS OVERVIEW MARKET LEADER IN A GROWING CATEGORY Rundown of 2015 All things considered 2015 was a rebuilding year. UNFI saw decent MSD growth on their core underlying business once you look past the loss of the Albertsons contract UNFI finished off their investments in infrastructure, preparing them for future growth well into the future The company is coming out of 2015 with a few lessons learned and the ability to generate a lot of cash to execute further expansion if need be, either organically or through M&A Our Thoughts on KeHE KeHE has been growing tremendously for the past two years After acquiring one of the top three natural and organic distributors (Nature s Best) in July 2014 They followed it up this July with winning the Albertsons contract from UNFI, they already had a small business with the company and it seems as though they went very low on price to win the rest Our view on KeHE is that they are going to need to digest this extensive growth and won t be a major threat for business Management Commentary The current trends are good. The first several weeks of our fiscal year are up approx. 100bps versus our P12 I would caution you, it s only the first two weeks of the year, but we re encouraged. We re ready to take on some new customers. We re ready to take on some M&A within those markets. comp growth is less important to us because what s embedded in our comp growth is new store openings. And there certainly have continue to be fairly robust pipeline of new store openings across many of the customers that we all follow. Data Source: Company Filings, Hedgeye. Management s Fiscal Year 2016 Guidance Net Sales $8.51bn to $8.67bn Diluted EPS $2.85 to $2.86 Capital Expenditures $49mm to $59mm Tax Rate 39.4% to 39.8% HEDGEYE 19

20 CLOSER TO THE CUSTOMER DISTRIBUTION CENTERS WITHIN 200 MILES OF 85% OF THE POPULATION After UNFI s investment in its infrastructure, it now has 33 distribution centers across the United States and Canada With this, they are within 200 miles of 85% of the population in the United States Their broad dense network allows them to offer industry leading prices Distribution is a game of distance and volume, so to the extent that customers order more it will be cost effective for all parties involved As they look for areas to grow through M&A it is logical to assume as they have said that they will be looking in the Texas or western region UNFI is uniquely positioned to benefit from the growth in better-for-you eating and snacking as they are the clear leader in the distribution space Data Source: Company filings. HEDGEYE 20

21 GROWTH STRATEGY Organic growth is key to success and after the recent loss of the Albertsons contract, there seems to be an overreaction to the future inability of UNFI to gain new contracts and grow existing ones Albertsons was a big loss, we don t mean to diminish that, at $410mm it represented a little less than 5% of the companies total revenue but it wasn t the end of the world Organic Growth To the extent that this was originally at an unfavorable price or clogging up capacity that UNFI could put to work for better, higher margin customers, this will turn out to be a positive for the company in the long run UNFI is working to grow their foodservice offering by partnering with leading vendors around the country such as Aramark, Compass Group and Sodexho, but this still is under 5% of their total business Mergers & Acquisitions The competitive landscape within the distributor space is very fragmented, you have UNFI as the top player with about a 12% market share and KeHE as a distant second, after that it drops off a cliff to more than 200 regional and local distributors Although it brings immense local competition, it also brings the opportunity for M&A UNFI is a one stop shop for all natural and organic products UNFI has two self-manufactured private label brands that both grow in the high double digits every year: One of UNFI s top uses of cash over the next couple of years will be M&A, their pipeline of high quality potential assets is robust, we are expecting them to make a medium size acquisition focused on the perimeter or ethnic food as those are the fastest growing areas Field Day a private label everyday low price brand is distributed to independent exclusively and serves as their private label Woodstock is a private label brand sold more broadly We are very confident in UNFI s ability to not only maintain and grow current accounts but to grow their business organically as retailers realize the breadth of their offerings and the quality of their service Data Source: Company filings, FactSet, Hedgeye Estimates. HEDGEYE 21

22 FINANCIALS

23 MODEL SNAPSHOT 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Oct-13 Jan-14 Apr-14 Jul-14 FY14 Oct-14 Jan-15 Apr-15 Jul-15 FY15E Oct-15 Jan-16 Apr-16 Jul-16 FY16E Net Sales $1,602 $1,646 $1,782 $1,764 $6,794 $1,992 $2,025 $2,115 $2,064 $8,195 $2,112 $2,110 $2,233 $2,171 $8,625 COGS $1,331 $1,378 $1,484 $1,474 $5,667 $1,673 $1,717 $1,789 $1,734 $6,913 $1,776 $1,789 $1,886 $1,822 $7,273 COGS % of Sales 83.1% 83.7% 83.3% 83.6% 83.4% 84.0% 84.8% 84.6% 84.0% 84.4% 84.1% 84.8% 84.5% 83.9% 84.3% Gross Profit $271 $268 $298 $290 $1,127 $319 $307 $326 $330 $1,282 $336 $320 $346 $349 $1,352 Gross Margin 16.9% 16.3% 16.7% 16.4% 16.6% 16.0% 15.2% 15.4% 16.0% 15.6% 15.9% 15.2% 15.5% 16.1% 15.7% SG&A $223 $219 $236 $239 $917 $261 $250 $257 $267 $1,034 $274 $260 $271 $280 $1,086 SG&A % of Sales 13.9% 13.3% 13.2% 13.5% 13.5% 13.1% 12.3% 12.1% 12.9% 12.6% 13.0% 12.3% 12.1% 12.9% 12.6% Operating Profit $48 $49 $63 $51 $210 $58 $58 $69 $63 $248 $62 $61 $75 $69 $266 Operating Margin 3.0% 3.0% 3.5% 2.9% 3.1% 2.9% 2.8% 3.3% 3.1% 3.0% 2.9% 2.9% 3.4% 3.2% 3.1% Other (income) / expenses $2 $2 $2 ($3) $3 $4 $3 ($0) $3 $10 $2 $2 $3 $2 $10 Tax Expense $19 $19 $24 $20 $82 $21 $21 $28 $24 $95 $23 $23 $28 $26 $101 Net Income $28 $28 $37 $33 $125 $33 $33 $42 $36 $144 $36 $35 $44 $40 $155 Diluted Earnings Per Share $0.56 $0.56 $0.73 $0.66 $2.51 $0.65 $0.65 $0.83 $0.72 $2.86 $0.71 $0.70 $0.86 $0.79 $3.06 Data Source: FactSet, Consensus Metrix, Hedgeye Estimates. HEDGEYE 23

24 STRONG BALANCE SHEET 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Assets Cash & Short-Term Investments Short-Term Receivables Inventories Other Current Assets Total Current Assets Net Property, Plant & Equipment Long-Term Note Receivable Intangible Assets Deferred Tax Assets Other Assets Total Assets Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt Accounts Payable Other Current Liabilities Total Current Liabilities Long-Term Debt Provision for Risks & Charges Deferred Tax Liabilities Other Liabilities Total Liabilities Improving cash position 2 Net Debt / EBITDA coming down after Tony s acquisition 3 Infrastructure investments behind them Will prioritize M&A going forward to expand 4 Net Debt / EBITDA Quarterly LTM 1.93x 1.89x 1.81x 1.66x 1.05x 1.03x 1.09x 0.80x 0.68x 0.75x 0.67x Common Equity Total Shareholders' Equity Q1 '13A Q2 '13A Q3 '13A Q4 '13A Q1 '14A Q2 '14A Q3 '14A Q4 '14A Q1 '15A Q2 '15A Q3 '15A Total Equity Total Liabilities & Shareholders' Equity Net Debt/EBITDA Data Source: Company Filings, FactSet, Hedgeye. HEDGEYE 24

25 INVENTORY MANAGEMENT 60% 12% 50% 40% 53.3% 46.3% 46.1% 43.1% 51.0% 46.6% 46.1% 42.8% 52.3% 46.5% 46.7% 47.3% 49.4% 45.7% 44.8% 10% 8% 6% 4% 30% 2% 0% 20% -2% 10% -4% -6% 0% Q1 '12A Q2 '12A Q3 '12A Q4 '12A Q1 '13A Q2 '13A Q3 '13A Q4 '13A Q1 '14A Q2 '14A Q3 '14A Q4 '14A Q1 '15A Q2 '15A Q3 '15A -8% Inventory as a % of Sales YoY Growth Data Source: Company Filings, FactSet, Hedgeye Estimates. HEDGEYE 25

26 CAPEX IS SLOWING AFTER A COUPLE YEARS OF HEIGHTENED INVESTMENTS, UNFI IS PREPARED TO LEVERAGE THEIR NEW ASSET BASE $160 $140 $147 $138 $120 $ in millions $100 $80 $60 $40 $47 $51 $32 $55 $41 $31 $67 $55 $20 $19 $0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E Data Source: Company Filings, FactSet, Hedgeye Estimates. HEDGEYE 26

27 FREE CASH FLOW ACCELERATING $150 $100 $95 $77 $92 $ in millions $50 $0 -$50 $28 Q1 '12A Q2 '12A $13 Q3 '12A Q4 '12A Q1 '13A Q2 '13A -$13 Q3 '13A -$7 $39 Q4 '13A Q1 '14A Q2 '14A -$34 Q3 '14A -$25 $48 Q4 '14A $19 Q1 '15A Q2 '15A -$6 Q3 '15A Q4 '15E -$48 $41 Q1 '16E Q2 '16E $31 Q3 '16E Q4 '16E -$66 -$100 -$102 -$88 -$150 -$127 Free Cash Flow Average LTM Data Source: Company Filings, FactSet, Hedgeye Estimates. HEDGEYE 27

28 CANADIAN DOLLAR LAPPING THE HEADWIND MIDWAY THROUGH Q2 (NOV/DEC) $ % $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $ % 15% 10% 5% 0% -5% $ /01/11 03/01/12 09/01/12 03/01/13 09/01/13 03/01/14 09/01/14 03/01/15-10% USD/CAD YoY Change Data Source: FactSet. HEDGEYE 28

29 SENTIMENT VALUATION

30 STREET SENTIMENT FADING 100% 90% 7% 7% 6% 6% 6% 6% 6% 12% 12% 12% 6% 6% 5% 5% 5% 6% 6% 5% 5% 5% 5% 5% 10% 14% $90 $80 80% 37% 32% 33% 28% 30% 30% 35% 32% 25% 26% 40% 40% 44% 44% 45% 70% 47% 47% 53% 53% 41% 41% 50% 47% 60% 50% 40% 63% 67% 65% 65% 58% 61% 65% 63% 70% 68% 30% 53% 53% 50% 50% 47% 47% 47% 47% 41% 41% 41% 44% 50% 20% 10% 0% 50% 48% 40% 38% $70 $60 $50 $40 $30 $20 $10 $0 Buy+Overweight Hold Sell+Underweight Target Price Actual Price Data Source: Hedgeye Research, FactSet. HEDGEYE 30

31 EARNINGS REVISIONS 1-year EPS Revisions vs. Stock Price Share Price $90 $85 $80 $75 $70 $65 $60 $55 $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 9/5/ /5/2014 3/5/2015 6/5/2015 $2.98 $2.96 $2.94 $2.92 $2.90 $2.88 $2.86 $2.84 $2.82 $2.80 EPS Estimate Stock Price (Local) EPS Consensus Estimate Data Source: Hedgeye Research, FactSet. HEDGEYE 31

32 SHORT INTEREST SHORT INTEREST SPIKED WHEN KEHE PURCHASED NATURE S BEST AND SPIKED AGAIN MOST RECENTLY WHEN UNFI LOST THE ALBERTSONS CONTRACT 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Data Source: Hedgeye Research, FactSet. HEDGEYE 32

33 UNFI IN ITS OWN FINANCIAL CRISIS UNFI IS TRADING AT U.S. ECONOMY RECESSION LEVELS 0.68x 0.53x 0.53x 0.51x 0.49x 0.41x 0.44x 0.42x 0.39x 0.44x 0.43x 0.29x 0.30x 0.34x 0.30x 0.29x 0.24x FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E Data Source: FactSet, Hedgeye Estimates. HEDGEYE 33

34 5 YEAR EV / NTM EBITDA TREND 15.0x 14.5x 14.0x 13.5x 13.0x 12.5x 12.0x 11.5x 11.0x 10.5x 10.0x 9.5x 9.0x 8.5x 8.0x 7.5x 7.0x 6.5x 11/23/10 5/17/11 11/08/11 5/01/12 10/23/12 4/16/13 10/08/13 4/01/14 9/23/14 3/17/15 6.0x 9/08/15 +1 STD -1 STD +2 STD -2 STD Average EV / NTM EBITDA EV / NTM EBITDA Data Source: Hedgeye Research, FactSet. HEDGEYE 34

35 14x HIGH GROWTH DISTRIBUTOR TRADING AT A DISCOUNT UNFI TRADING AT A VALUE BELOW SYY FOR THE FIRST TIME SINCE x 12x 11x 10x 9x 8x 7x 6x UNFI - EV/EBITDA - NTM SYY - EV/EBITDA - NTM Data Source: Hedgeye Research, FactSet. HEDGEYE 35

36 VALUATION SNAPSHOT United Natural Foods, Inc. $ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION (FY ends Dec.) NTM 2015E 2016E 2017E (Consensus in mm) NTM FY2015E FY2016E Stock Price $ Hedgeye EPS $2.99 $2.86 $3.06 $3.37 Sales $6,794.4 $8,189.0 $8,579.7 Shares Outstanding 50.1 % Chg YoY 7.0% 10.1% % Chg YoY 20.5% 4.8% Market Cap $ 2,484.4 Consensus $2.99 $2.85 $2.95 $3.29 EBITDA $ $313.5 $ Net Debt $ % Chg YoY 3.4% 11.7% % Chg YoY 19.9% 6.1% + Preferred Equity $ - Variance % 0.2% 3.7% 2.3% EBITDA Margin* 4.9% 3.8% 3.9% + Minority Interest $ - P/E 15.6X 16.4X 15.8X 14.1X EV/EBITDA 9.0X 9.6X 9.0X Enterprise Value $ 3,009.8 INVESTMENT POSITIVES INVESTMENT NEGATIVES NTM EBITDA $ ) Growth prospects of the industry 1) Distributor competition NTM EV/EBITDA 9.0x 2) Industry leader 2) Direct or captive distribution NTM EPS $ ) Growth through M&A NTM P/E 16.6x 4) Valuation 1X Turn $ 6.71 Upside/Downside 13.5% Source: Factset, Company Filings *Consensus EBITDA Margin HEDGEYE RISK MANAGEMENT Data Source: Hedgeye Research, FactSet. HEDGEYE 36

37 VALUATION Given the current concerns, UNFI is trading at an 11% discount to SYY on an EV / NTM EBITDA basis. We believe that UNFI deserves to trade at a slight premium to SYY due to UNFI s competitive position and the significantly greater growth prospects the company has. EBITDA NTM EV/EBITDA Multiple 8.50x 8.80x 9.10x 9.40x 9.70x 10.00x 10.30x 10.60x 10.90x 11.20x 11.50x 11.80x $323 $44.35 $46.28 $48.22 $50.16 $52.09 $54.03 $55.96 $57.90 $59.83 $61.77 $63.70 $65.64 $326 $44.90 $46.85 $48.81 $50.76 $52.72 $54.67 $56.63 $58.58 $60.54 $62.49 $64.45 $66.40 $330 $45.45 $47.43 $49.40 $51.37 $53.35 $55.32 $57.30 $59.27 $61.25 $63.22 $65.20 $67.17 $333 $46.01 $48.01 $50.00 $51.99 $53.99 $55.98 $57.98 $59.97 $61.96 $63.96 $65.95 $67.95 $336 $46.58 $48.59 $50.60 $52.62 $54.63 $56.65 $58.66 $60.67 $62.69 $64.70 $66.72 $68.73 $340 $47.15 $49.18 $51.22 $53.25 $55.28 $57.32 $59.35 $61.39 $63.42 $65.46 $67.49 $69.52 $343 $47.72 $49.78 $51.83 $53.89 $55.94 $58.00 $60.05 $62.11 $64.16 $66.21 $68.27 $70.32 $346 $48.31 $50.38 $52.46 $54.53 $56.61 $58.68 $60.76 $62.83 $64.91 $66.98 $69.06 $71.13 $350 $48.89 $50.99 $53.08 $55.18 $57.28 $59.37 $61.47 $63.56 $65.66 $67.76 $69.85 $71.95 BEAR BASE BULL -11% 14% 45% Data Source: Hedgeye Research, FactSet. HEDGEYE 37

38 VALUATION METRIC DASHBOARD VS. SYY Profitability (Trailing 12 Months) Financial Strength (Most Recent Qtr) Description UNFI SYY Description UNFI SYY Gross Profit Margin 16.90% 16.53% Quick Ratio 1.09x 0.94x Operating Margin 3.09% 3.41% Current Ratio 2.73x 1.22x Profit Margin 1.78% 2.00% Net Debt / EBITDA 1.46x 1.17x Long Term Debt/Equity 39.8% 43.2% Debt/Assets 21.5% 40.7% Dividend (Trailing 12 Months) Price/Earnings (TTM) 26.98x 23.96x Description UNFI SYY Price/Sales 0.43x 0.47x Dividend Yield 0.0% 3.0% Price/Book 2.51x 4.34x Annual Dividend $0.00 $1.15 Price/Cash Flow 44.33x 14.78x Management Effectiveness Revenue (Trailing 12 months) Description UNFI SYY Description UNFI SYY Return on Assets 5.9% 4.4% Revenue $6,064 $46,517 Return on Equity 10.7% 13.0% Revenue/Share $122 $79 Return on Invested Capital 8.0% 9.0% Quarterly Revenue Growth (YoY) 12.9% 6.1% Valuation Description UNFI SYY EV / NTM EBITDA 9.03x 10.16x Operating Ratios EBITDA $230 $2, Revenue Estimate $8,189 $50,864 EV / NTM EBIT 11.49x 13.28x Description UNFI SYY EV / NTM Sales 0.35x 0.50x Asset Turnover 3.4% 3.1% Inventory Turnover 7.5% 15.3% Receivable Days Data Source: FactSet. HEDGEYE 38

39 SUMMARY

40 WHAT WE THINK ABOUT THE POTENTIAL RISKS THE THREATS ARE NOTABLE, BUT UNFI IS READY TO DEFEND Competition KeHE being the competition from a distributor side, UNFI also must deal with the growing direct to retail distribution trend UNFI differentiates itself through value-added services leading to reduced complexity for their customers Retailer Private Label Retailer private label is something everyone in the food industry has to battle with just like any other competitor Private label never seems to get more than low to midteens dollar market share of a category Consumer Preference Natural & Organic is a lifestyle that many consumers are choosing It s not just for upper class citizens, this food is becoming more affordable and available in all major retailers, with dedicated shelf space growing Data Source: Hedgeye. HEDGEYE 40

41 SUMMARY OF OUR THOUGHTS 1 Market share leader 2 Improving financial picture 3 4 Risks are overblown Strong underlying trends of the Natural & Organic category HEDGEYE 41

42 FOR MORE INFORMATION CONTACT: HEDGEYE 42