SYSCO Corporation (SYY), United Natural Foods, Inc. (UNFI): Food Distribution Is a Great Business

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SYSCO Corporation (SYY)One segment that is highly fragmented is the food-distribution business. There are many mom and pop food distributors spread out across the country. Many offer specialty items and few offer one-stop shopping for the restaurant industry. Many chefs shop from several food distributors to supply their restaurants by focusing on quality and price.

The largest player in the segment is SYSCO Corporation (NYSE:SYY) followed by privately-held US Foods. The segment is now seeing the rise of smaller players that cater to a specific niche. United Natural Foods, Inc. (NASDAQ:UNFI) sells natural and organic foods to specialty grocers like Whole Foods Market, Inc. (NASDAQ:WFM). The Chefs Warehouse, Inc (NASDAQ:CHEF) sells specialty items like cheeses to high-end restaurants. All three companies look attractive in the long run.

The food-service giant

SYSCO Corporation (NYSE:SYY) distributes food products to restaurants, healthcare and educational facilities, hotels, and other food-services and hospitality businesses. The company also distributes non-food items including paper products, tableware, cleaning supplies, and kitchen equipment and supplies. Sysco operates 185 distribution facilities in the U.S., Canada, Ireland, and the Bahamas serving approximately 400,000 customers.

In the most recent quarter, sales increased by 4% to $10.9 billion. Earnings disappointed and came in 22.7% lower at $0.34 per share. The company cited a weak economy and poor weather for the drop in earnings as less people frequented restaurants.

The growth for SYSCO Corporation (NYSE:SYY) is in expansion. The food-distribution business is a $235 billion business growing 1% to 2% annually. With approximately $43.9 billion in revenue, Sysco is the largest player and has the financial capability to buy any player it wishes. Acquisitions have been a big part of Sysco’s growth that has seen the company grow from only $115 million in revenue in 1970 when Sysco went public.

To finance expansion, SYSCO Corporation (NYSE:SYY) has $335.51 million in cash and only $2.8 billion in debt on the balance sheet. Operating cash flow last year was $1.3 billion, so Sysco can easily service more debt. So far in fiscal 2013, Sysco has completed 11 acquisitions that will add $1 billion in revenue.

The go-to distributor for natural and organic foods

United Natural Foods, Inc. (NASDAQ:UNFI) is a national distributor of natural, organic and specialty foods and products including nutritional supplements, personal-care items and organic produce. The company operates 26 food-distribution centers in the U.S. and Canada. Its customers include food cooperatives, supermarkets, natural-food stores, and specialty retailers.

In the most recent quarter, sales increased 12.8% to approximately $1.6 billion. Net income increased 8.9% to $31.6 million. Gross margin for the quarter was 16.8%.

There are several avenues for growth for United Natural Foods, Inc. (NASDAQ:UNFI). For one, it is the largest natural and organic food distributor with over 65,000 specialty items. With 26 distribution centers, the company now has the scale to service more grocery store chains.

Consider that Whole Foods Market, Inc. (NASDAQ:WFM) relies on United Natural for 31% of the goods sold in its stores. Safeway Inc. (NYSE:SWY) relies on United Natural for only 0.6% of its goods. United Natural Foods, Inc. (NASDAQ:UNFI) has very small relationships with The Kroger Co. (NYSE:KR) and Publix. As more consumers go organic, I see these chains turning to United Natural to satisfy their customers’ demands and increasing revenue for United Natural.

Second, United Natural Foods, Inc. (NASDAQ:UNFI) could grow via acquisition. The company has only $175 million in debt and there are an estimated 200 smaller, regional players in the organic-food-distribution business. The Organic Trade Association forecasts organic sales to grow 9% annually. As the largest player in the organic-food- distribution space, there’s plenty of room for United Natural Foods to grow.

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