United Natural's 7-Year Hitch

Organic goods are big business these days, both for retailers and organic-food suppliers such as United Natural Foods (NASDAQ:UNFI). On Monday, the distributor announced the heartening news of its renewed agreement with one of the biggest names in organic groceries, Whole Foods Market (NASDAQ:WFMI).

There are now plenty of outlets for organic goods; in its last 10-K, other United Natural Foods customers included BJ's Wholesale (NYSE:BJ), Costco (NYSE:COST), regional grocer Wegman's, and Kroger (NYSE:KR). But Whole Foods is an important customer to United Natural. It's the first name many people associate with organic groceries, and United Natural's last quarterly filing disclosed that Whole Foods represented 27% of its revenues in that period. (By comparison, Wild Oats (NASDAQ:OATS) represented 9%.)

The agreement is good for United Natural Foods on many levels. Its previous deal, due to expire in December 2007, spanned only three years. The new one will run for seven, and it includes minimum purchases from Whole Foods. According to United Natural's 8-K filing, the agreement requires that Whole Foods purchase a stated minimum amount of products in certain regions from United Natural each year. It also requires that in nine of the 11 regions, Whole Foods must purchase from United Natural a majority of the products it purchases from all wholesale natural grocery distributors. Additional details weren't revealed, but it sounds like United Natural Foods has a pretty sweet deal with Whole Foods. Meanwhile, Whole Foods said the agreement will allow it to "concentrate our capital investment and resources on aggressively expanding our store base," something many Whole Foods investors are looking forward to as well.

It's no surprise that United Natural Foods has a big stake in Whole Foods Market's continued success. The distributor relies on continued relationships with its major customers, Whole Foods and Wild Oats. Its regulatory filings list the loss of either of these two customers as a risk to its business, and the risk that negotiations might fail was noted earlier this year. The new deal must be one worry off United Natural shareholders' minds, especially since Whole Foods is expected to continue on its successful growth trajectory as it opens new stores in new markets.

United Natural took the opportunity to reiterate its guidance for an 11% to 15% increase in revenues this year, and a 15% to 19% increase in earnings per share. In its most recent fiscal year, it reported a modest $5.9 million in positive cash flow; in the previous year, free cash flow had been $54.9 million in the hole.

These encouraging developments don't necessarily mean that United Natural is a good deal for investors at the moment. Its healthy growth is accompanied by a trailing P/E ratio of 31. There are plenty of things to like about this company, but it seems there could be more opportune times to take a bite out of United Natural Foods.

For more on organics, check out:

• Dean's Organic Dilemma
• Taking a Bite Out of Whole Foods
• Fool on Call: United Natural Foods

Whole Foods Market and Costco areMotley Fool Stock Advisorrecommendations.To discover all of David and Tom Gardner's top investing opportunities, try our flagship newsletter service free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned.