United Natural (UNFI) Q1 Earnings: What's In The Cards?

United Natural Foods, Inc. (NASDAQ:UNFI) is set to report first-quarter fiscal 2017 results after the market closes on Dec 7. Last quarter, this food products manufacturer posted a positive surprise of 12.90%.

In fact, the company has delivered positive earnings surprises in three out of the last four trailing quarters, making for an average positive surprise of 5.36%.

Let’s see how things are shaping up prior to the announcement.

Factors to Consider

United Natural’s productivity initiatives, improved operational efficiency, acquisitions and continuous increase in demand for organic and natural food products have been the strength of the company. In the past 12 months, the company has acquired four exciting and uniquely positioned companies including Haddon House specialty foods, Global Organic, Nor-Cal and Gourmet Guru. With these companies, United Natural is now positioned as a large national provider of fresh produce, proteins, bakery, deli, specialty and natural products.

Though encouraged by consumers’ increasing demand for organic products, driven by a healthy lifestyle, food safety and environmental sustainability, we cannot ignore the fact that the company has been struggling from continued weakness in gross margin over the past many quarters. This is due to a shift in customer mix to lower-margin supermarkets channel. The company’s recent acquisitions, despite being accretive to the top line, put pressure on margins.

Further, we note that the grocery/supermarket business is grappling with food deflation, stiff competition, aggressive promotional environment and waning store traffic. These headwinds have resulted in a sharp decline in share price of major food grocers like The Kroger Co. (NYSE:KR) , Whole Foods Market (NASDAQ:WFM), Inc., Supervalu, Sprouts Farmers Market as well as United Natural. An oversupply in some types of food -- particularly meat, poultry and dairy -- has dragged prices lower and forced grocery stores into more aggressive promotions.

The price wars between companies are eating up profits, resulting in a further decline in margins in the near term.

Though the share price of United Natural has been outperforming other companies in the space like Campbell, Kellogg, and J.M. Smucker, its gross margin is declining and is far below these companies.

Earnings Whispers

Our proven model does not conclusively show that United Natural is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: The ESP for United Natural is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 62 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: United Natural has a Zacks Rank #3. However, the favorable rank when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Stocks in the consumer staples/retail sector that have both a positive earnings ESP and a favorable Zacks Rank include:

Sysco Corp. (NYSE:SYY) with an Earnings ESP of +1.89% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

B&G Foods, Inc. (NYSE:BGS) with an Earnings ESP of +2.50% and a Zacks Rank #3.

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