What happened

Shares of organic and natural foods distributor and supermarket operator United Natural Foods (UNFI 1.20%) tumbled 27.5% through 11:15 a.m. ET Wednesday morning after the company announced a big earnings miss.

Despite edging out analyst predictions for $7.8 billion in sales for its fiscal second quarter of 2023, United Natural Foods whiffed badly on earnings, reporting a non-GAAP (adjusted) profit of only $0.78 per share where Wall Street had expected $1.46. (And as you'll see below, the generally accepted accounting principles number was even worse.)

So what

The news wasn't all bad, but it was still bad enough. Sales grew slightly faster than expected in fiscal Q2, up 5.4% year over year. But "profits were challenged," CEO Sandy Douglas said, pointing to "accelerating inflation" and "supply chain volatility" as two of the culprits for United Natural Foods missing analysts' earnings target.  

Gross profit margin slumped 80 basis points to 13.7%, with noncash charges related to how the company accounts for the value of inventory (specifically, using last in, first out valuation, or LIFO) accounting for some of the decline. Honestly, though, United Natural's razor-thin profit margin was the bigger problem, transforming actually very modest changes in cost of goods sold (up 6.4%) and operating costs (up 6.1%) -- neither that much greater than sales growth of 5.4% -- into big swings in net profits on the bottom line.

There, you can see how tiny changes in costs translated into a huge swing in GAAP profits. From earning $1.08 per share, GAAP, a year ago, United Natural's per-share profits shrank 71% to just $0.31 in fiscal Q2 2023.

Now what

That swing seems to have unnerved even United Natural Foods' own management, which responded to its changes in costs by lowering its forecast for the rest of fiscal 2023, and withdrawing its forecast for fiscal 2024 entirely.

While management still sees sales growing about 5% this year to more than $30.1 billion, and even growing a bit better than previously forecast, earnings per share are now expected to decline by 53% year over year, to somewhere between $1.50 per share and perhaps $2.35. Adjusted earnings will do a bit better, falling only 28% year over year. But by the more standard measure, United Natural Foods stock now sells for about 15.5 times the midpoint of its guidance range for GAAP profits.

For a growing business, that might sound cheap.

For a company that's predicting its profits will fall by more than half, however, it probably isn't.