StockStory advises avoiding United Natural Foods on weak margins

StockStory advises investors to avoid United Natural Foods, citing stagnant sales growth, low gross margins, and mediocre returns on invested capital. The independent research firm describes the consumer staples distributor as a low-quality business that lacks the pricing power necessary to generate sustainable operating profits.

United Natural Foods shares have tread water over the past six months, recording a small loss of 2.6% and settling at $46.87 per share. During this same period, the S&P 500 gained 6.8%, meaning the stock underperformed the broader market. StockStory notes that while the current valuation is fair, the potential upside is limited compared to the downside risk.

The firm’s analysis begins with a review of long-term sales performance, which it argues reveals the true quality of a business. United Natural Foods struggled to consistently increase demand, with trailing 12-month sales of $31.15 billion remaining close to revenue levels from three years ago. StockStory states that this lack of consistent growth signals a low-quality business, failing to meet the firm’s standards for durable, multi-year expansion.

Unit economics further support StockStory’s cautious stance. The company averaged a 13.4% gross margin over the last two years, indicating it operates in a competitive market where products are easily substituted. For every $100 in revenue, approximately $86.57 went toward raw materials, production, transportation, and distribution. StockStory prefers businesses with high gross margins because they indicate pricing power or differentiated products, giving companies a better chance to generate higher operating profits.

Capital efficiency offers additional evidence for the sell recommendation. United Natural Foods historically invested in growth initiatives with mixed results, posting a five-year average return on invested capital (ROIC) of 2.7%. This figure is lower than the typical cost of capital for consumer staples companies, meaning the firm generates less operating profit relative to the money it raises through debt and equity than it costs to acquire that capital.

StockStory concludes that despite valuing companies that help consumers, United Natural Foods does not meet its investment criteria. The firm suggests looking elsewhere for superior opportunities, specifically highlighting dominant software businesses as preferred alternatives. The analysis does not provide a specific price target but emphasizes that the risk-reward profile is unfavorable relative to other available stocks in the market.