Chalk up another fine quarter for United Natural Foods (NASDAQ:UNFI). Yesterday, the company announced record second-quarter results that featured a 31.8% jump in net earnings (excluding charges) on a 16.2% gain in sales. On the surface, this distributor of natural foods looks to be about as healthy as the food it distributes.

After all, Wild Oats Markets (NASDAQ:OATS) has named United Natural Foods as primary distributor to its 102 "supernaturals" (as the big box natural food stores are called). That's big business. The fact that inventories stayed steady and total debt rose only slightly -- even while the company phased in a major client like Wild Oats -- is more good news.

All-important margins, however, were more of mixed bag. Operating margins increased to 3.5% (up from 3.2% last year), and the company sees 3.8% as a reasonable level for the future. It's great to see margins improving, but even embattled Kroger (NYSE:KR) manages 4.4% margins. And remember, supermarkets are known for low margins, so this bears watching.

So, too, does the fact that Whole FoodsMarket (NASDAQ:WFMI), the world's largest retailer of natural and organic foods, accounts for a full 25% of sales. True, Whole Foods may not wield pricing power like Wal-Mart (NYSE:WMT), but that's a level of customer concentration that bears watching.

All that having been said, United Natural Foods is executing and is, perhaps more than anything, a question of valuation. The company is free cash flow (FCF) positive and expects to earn $1.46 to $1.52 a share for full-year 2004 (ending July 31). That puts the stock, which trades today near its 52-week high, at about 34 times forward earnings.

On the one hand, that's a bit rich. On the other hand, it reflects the positive impacts of the Wild Oats deal, the margin improvement, and the growing popularity of organic foods. Investors looking to participate in this growing trend, but who are hesitant to buy the supermarkets, might consider United Natural Foods a healthy (and growing) alternative.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. If you want to discuss United Natural Foods with other investors, join in on the conversation at The Motley Fool's discussion boards.