United Natural Foods' Strong Performance Is Set to Continue

United Natural Foods (NASDAQ: UNFI  )  is a leading independent and national distributor of natural, organic, and specialty foods and related products. It is continuing its streak of good performances on the back of growing demand for natural and organic food products and supplements. The U.S. organic food market is slated to grow at a compounded annual growth rate, or CAGR, of 14% from 2013 to 2018.

Also, as per TechNavio insights, the global organic food and drink market is projected to reach $223.5 billion in 2016. This presents a huge opportunity for United Natural Foods and other players in the same market such as Hain Celestial (NASDAQ: HAIN  )  and Annie's (NYSE: BNNY  ) .

Performance so far
As we see in the chart below, United investors are sitting on handsome gains of 132% generated in the last couple of years. The stock has outperformed peers and the broader market by a handsome margin.

UNFI Chart

United Natural Foods data by YCharts

The company's financial performance has also been quite impressive so far. In the second quarter of fiscal 2014, United's sales surged an impressive 13.9% year over year to $1.6 billion. The growth was driven by an increase in demand for the company's organic and natural food products, besides acquisitions. The growth occurred across all channels with supermarket, supernatural, and independent retailers contributing 26%, 37%, and 32% of sales, respectively.

Despite losses due to bad weather, revenue was in line with consensus estimates. On the back of top-line growth, earnings surged 21.7% versus the comparable quarter in the prior year.

A look at the growth drivers
One of United's important growth drivers is its capacity and the ability to deliver products to different channels in the quickest possible time. With its Denver facility completed last summer and four projects under way, United is aggressively adding to its capacity. It has plans to build more than 2 million square feet of new warehouses by 2019, thus enhancing its capacity and logistic efficiencies and thereby adding to profitability.

The U.S. is facing an acute shortage of farmers, with the average age of farmers at 60 years old. United has partnered with other industry leaders to support organic farmers. It has also responded proactively to consumer demand for truth in labeling. Also, 97% of its Blue Marble brand products are non-GMO.

United is on course with its planned acquisition and integration of Trudeau Foods. The company has signed agreements for building a new distribution center in Prescott, Wis. to serve the greater Minneapolis/St. Paul, Minn. market. With the presence of some of the most innovative and exciting specialty and organic retailers in this market, this will be a growth driver going forward.

Hain is also counting on acquisitions
When it comes to acquisitions, Hain has been a serial acquirer in the past as a part of its strategic growth initiatives. Tilda -- a premium Basmati and specialty rice company -- was its latest acquisition completed this year. Hain's second-quarter sales increased 17% year over year on the back of robust performance from two of its acquisitions -- BluePrint and Ella's Kitchen. Within the first three weeks of completing the Tilda acquisition, there have been calls from North American retailers looking to buy Basmati rice. This indicates that the Tilda acquisition will enhance the company's performance going forward.

Looking ahead, Hain will be exploring the possibility of introducing its products in new geographies such as the Middle East and India. It will continue to invest in growth by way of capacity expansion and acquisitions. It is expecting the growth momentum to continue going forward and is looking at sales growth of 20% to 23% and earnings-per-share growth of 23% to 30% in the second half of the current fiscal year.

Annie's: Not up to the mark
In sharp contrast, Annie's is trailing the broader market, and investors are sitting on a loss of around 8% as shown in the chart above. Although net sales in the third quarter of fiscal 2014 grew 22% and consumption grew even faster at approximately 24%, earnings per share declined due to higher-than-expected organic wheat costs.

Annie's is expanding the distribution of its granola bar line, which was upgraded with new formulations and gluten free stock keeping units. In addition, the integration of the Joplin acquisition is also expected to be a growth driver. Annie's expects to deliver 20% year-over-year earnings-per-share growth in the fourth quarter of the current fiscal year, so there might be a turnaround in store for the company.

Bottom line
United Natural seems to be making some really good moves in the organic foods market. The company is promoting GMO-free items and is also backing farmers for long-term growth. In addition, capacity expansion and acquisitions could lead to better times for United going forward, making it an investment worth considering.

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