Whole Foods Market, Inc. (WFM), United Natural Foods, Inc. (UNFI): This Hidden Gem Is Supplying a Huge Growth Industry

While organic and natural food companies tend to command a higher margin over conventional competitors, United Natural Foods, Inc. (NASDAQ:UNFI)’s is actually slightly lower than SYSCO Corporation (NYSE:SYY)’s. You can chalk that up to SYSCO Corporation (NYSE:SYY) being so much larger and more able to take advantage of economies of scale, but the same could be said of Whole Foods Market, Inc. (NASDAQ:WFM) versus Safeway Inc. (NYSE:SWY) – and Whole Foods has a profit margin four times higher than Safeway Inc. (NYSE:SWY)’s.

Management blamed the gross profit decline on increased freight costs and a consumer shift toward conventional supermarkets. The freight costs aren’t United Natural’s fault, but are related to suppliers being out of stock of certain products. In these situations, United Natural often elects to move products around the country at its own expense to ensure high levels of service, and this quarter happened to be a blip with higher out-of-stocks.

The shift in customer mix is, well, a mixed bag. On one hand, United Natural represents a much larger market segment than natural and organic food stores; on the other hand, because conventional grocery stores tend to have a lower margin, serving as their distributor is also less profitable.

The Foolish bottom line
United Natural is one of a handful of companies that have been riding a growth wave for several years now, one which is likely to continue as consumers get more serious about being healthy.

That said, the company has high expectations for its fourth quarter, which seem somewhat unrealistic. Additionally, management expects its already razor-thin profit margin to be further compressed as it goes after bigger fish to fry. If sales growth can stay ahead of that curve, investors will still be rewarded, but at a price-to-earnings ratio of 27, a lot of that growth is already priced into the stock. This is definitely one to keep on your watchlist, but maybe not to add to your portfolio just yet.

The article This Hidden Gem Is Supplying a Huge Growth Industry originally appeared on Fool.com is written by Jacob Roche.

Fool contributor Jacob Roche has no position in any stocks mentioned. The Motley Fool recommends Sysco and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market.

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