United Natural Gets Wild

Holy granola! United Natural Foods (NASDAQ:UNFI) investors surely felt healthy this morning after the organic and natural foods distributor said it had regained what was once its second-largest customer -- a customer it lost to a competitor in 2002. The company boosted its sales outlook for fiscal 2004 on the deal with Wild Oats (NASDAQ:OATS), and the stock went nuts, with shares up as much as 15% this morning.

Actually, though, the exclamation "holy granola" is probably a bit too strong, as the five-year gig with Wild Oats isn't wholly unexpected. United Natural Foods disclosed in its third-quarter press release that it expected to get its erstwhile customer back on board in the beginning of this year.

As it stands now, Whole Foods Market (NASDAQ:WFMI) is its largest customer, representing 24% of its net sales in fiscal 2003. Back in fiscal 2002, when Wild Oats was still United Natural's second-largest customer, it represented 14% of its sales.

Today's announcement included United Natural upping its revenue forecast to the $1.60 billion to $1.62 billion range, compared to its previous expectation of $1.55 billion to $1.57 billion. United Natural said it expects earnings of $1.46 to $1.52 per share (excluding special items), up from $1.42 to $1.46 a share.

Bear in mind, Wild Oats has struggled a bit since it switched to Tree of Life as its primary distributor. In October, the natural foods grocer outlined major supply chain problems, ranging from products that were out of stock to glitches with stock-keeping unit designations. The assumption is that the reconciliation with United Natural will tame some of the crazy times at Wild Oats.

In addition, United Natural's announcement outlined a special charge related to the deal, which it expects to be $1 million over the second and third quarters of fiscal 2004. The company also said it has assigned and transferred its obligations to a third party, which will result in its revolving credit facility bearing interest at a variable rate based on LIBOR.

Given that the three-month transition period with Wild Oats goes smoothly, there are lots of reasons to applaud a deal where a former major customer returns to the fold. As long as the supply problems Wild Oats had over the last year haven't alienated its own customers, United Natural's looking to have lined itself up a sweet deal.

Is this great news, or do you just say pass on United Natural and the Wild Oats deal? Is organic just a passing fad? Discuss the industry on the Food discussion board.

Alyce Lomax welcomes your feedback at [email protected].