What happened
Shares of United Natural Foods (UNFI -0.86%), a natural and organic-foods wholesaler, were taking a dive this week even though there was no specific news out on the company. Instead, concerns about rising interest rates and the broader market sell-off seemed to pressure the stock downward.
As of Thursday's close, the stock was down 17.1% this week on high volume according to data from S&P Global Market Intelligence.
Image source: Getty Images.
So what
As a supermarket supplier, United Natural Foods doesn't fit the profile of the typical stock getting hit this week as it's mostly growth stocks and tech stocks that are plunging in the market rotation.
However, the company has sizable debt on its balance sheet and much of its operating profits go toward interest expense. Therefore, a rise in interest rates could make it more expensive for the company to refinance its debt in the coming years and also makes its variable-interest-rate debt more expensive.
In fiscal 2021, which ended July 31, 2021, United Natural Foods reported $294 million in operating income but $204 million interest expense, wiping out most of its profits. Last year was also a strong one for the company as it benefited from a boom in grocery spending during the pandemic.
United Natural Foods currently has $2.4 billion in long-term debt on its balance sheet, which is higher than its market cap at $2.2 billion. The company assumed about $1.6 billion in debt when it acquired wholesaler and supermarket operator SuperValu in 2018.
Now what
A 17% decline in three days on just macro issues seems to be an overreaction. United Natural Foods has executed well since the SuperValu deal and now trades at a price-to-earnings ratio of 10. Management had been forecasting modest adjusted earnings-per-share growth this year of 4% to between $3.90 and $4.20, but that's understandable after a boom last year.
Since United operates in a slow-growth industry with narrow operating margins, it's used acquisitions to boost its growth, but the market seems to be betting that rising interest rates will put the brakes on any future needle-moving acquisitions in the near term.
