United Natural Foods (NYSE:UNFI) delivered their fiscal year third-quarter earnings report on June 9, 2021. The company posted adjusted EPS of 94 cents which was ahead of analysts’ expectations for 88 cents. However, UNFI came in with revenue of $6.62 billion which was below forecast.
The revenue number was also lower on a year-over-year (YOY) basis. In the same quarter in 2020, United Natural Foods posted $6.67 billion. And on several other key metrics, UNFI’s was lower on a YOY basis.
However, the company’s earnings report was the first in which investors could see a two-year revenue comparison. And by that metric, UNFI’s revenue was a beat.
This is significant because for a company like UNFI 2020 can be viewed as an anomaly. And it’s important to put that anomaly in perspective when forming your short-term opinion on UNFI stock.
UNFI Keeps Bullish Company
For those that aren’t familiar with United Natural Foods, the company is the primary wholesale grocery distribution for Whole Foods Market and will continue that relationship until, at least, 2027.
If the name association game ended there, it would be bullish for UNFI stock. However, the story gets better. Whole Foods is a wholly-owned subsidiary of Amazon (NASDAQ:AMZN).
So let’s walk this business model through to a logical conclusion. United Natural Foods benefits as people are looking for healthier, sustainable food options that Whole Foods is known for. And in 2020, when many consumers opted for home delivery of groceries, Whole Foods remained a popular option via Amazon.
There are Potential Headwinds
Delivering Q3 revenue that was higher than the same quarter in 2019 (I.e. pre-pandemic) may indicate that consumers may continue to stock their pantries. For a company that has tight margins, it needs that scenario to emerge. Otherwise the company will have to rely on cost cutting and other accounting maneuvers to generate earnings growth.
However,analysts aren’t so sure. They’re projecting revenue growth of around 2.5%. They also have a consensus price target for UNFI stock of $25.88 which is over 20% below its price as of this writing.
Adding to the concern are rumors that the company is about to see some executives leave the company. Moves like this can be either bullish or bearish, but before they happen, they generally cause analysts to take a wait-and-see attitude towards a company’s stock.
From Overbought to Oversold?
Prior to delivering its earnings report, UNFI stock was up 140% in 2021 and short interest was uncomfortably high. It was a classic signal that analysts felt the stock price was too high and only a blowout earnings report would keep it moving higher.
United Natural Foods delivered, what could largely be seen as a solid single, when it needed a home run. However the selloff in UNFI stock has been steep and that the stock chart is showing a potentially bullish flag pattern. This seems to supported by the Relative Strength Indicator which is sitting at right around 39 as of this writing.
Beware of a Falling Knife
I like UNFI stock where it’s at now much more than I did prior to earnings. But it’s already passed two levels of support. If it breaks under $33, it could retest support around $32 which was where it was before the company announced a two-year extension to its deal with Whole Foods.
This seems like a likely scenario. Where’s the growth coming from? The economy is reopening even in the states that experienced the strictest and longest lasting mitigation restrictions, That should mean that consumers will move towards dining out rather than eating in.
But beauty is in the eye of the beholder and I’m sure a heavily sold off UNFI stock looks pretty attractive to some traders. There’s a lot to think about but without a solid floor in place, investors can find better options.
Before you consider United Natural Foods, you'll want to hear this.
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