What happened
Shares of United Natural Foods (UNFI 0.75%), a distributor of natural foods in the U.S. and Canada, fell as much as 20.5% this week according to data from S&P Global Market Intelligence. At the start of trading on Friday, March 11, the stock was still off by around 17.5%. The big news out of the company was its fiscal second-quarter 2022 earnings update. On the surface, the numbers didn't seem that bad, but when you dig in a little, there's some possible reasons to be worried about the future.
So what
United Natural Foods posted sales of $7.4 billion in the fiscal second quarter of 2022, up 7.5% from the same quarter of fiscal 2021. That was helped along by robust demand from existing customers and the addition of new customers. On the bottom line, the company reported adjusted earnings of $1.13 per share, down 9.6% from 2021 but above the $1.10 per share analysts had been expecting. All in all, not a bad quarter. The problem is that there were a number of headwinds that aren't expected to go away anytime soon.
Image source: Getty Images.
For example, even though United Natural Foods witnessed strong demand, it wasn't actually able to meet all of the demand that actually existed. Basically, it could have sold more but just didn't have the capacity to do it. The availability of labor was a big headwind with the company noting that it is still working to fill all of its open positions.
On top of that, the food distributor is also dealing with material cost increases. For example, on United Natural Foods' fiscal second-quarter 2022 earnings conference call, management noted that diesel fuel costs were 40% higher year over year in January. The company spent a significant amount of time discussing this and other inflationary pressures on the call with analysts. It also noted that a one percentage point change in interest rates would likely lower earnings by $0.06 per share because of the variable rate debt it is carrying. With the Federal Reserve talking about rate hikes, this is another issue that needs to be monitored.
Essentially, there are a lot of moving parts right now, and there's a very real risk that many of these headwinds will get worse before they get better.
Now what
Even after this week's loss, United Natural Foods stock is up around 300% since the start of 2020. However, that's down from a gain of more than 450% at the end of 2021. Basically, a lot of good news was priced in here following the pandemic, and now that the food distributor is starting to deal with some headwinds, investor enthusiasm has started to wane. That's not unreasonable given that the near-term future looks like it could remain challenging.
That said, the fact that United Natural Foods is seeing more demand than it can supply is kind of a long-term positive for the business. That assumes, of course, it can improve its customers' experiences before they start looking for alternate suppliers.
