Will United Natural (UNFI) Miss Q4 Earnings on Poor Margin?

United Natural Foods, Inc. UNFI is set to report fourth-quarter and fiscal year 2014 results after the market closes on Sep 17. Last quarter, this food products manufacturer posted a negative surprise of 1.35%. Let's see how things are shaping up prior to the announcement.

Factors to Consider

The continued weakness in gross margins over the past few quarters due to the shift in customer mix to lower-margin conventional supermarkets has been a major concern for United Natural.

Generally, gross profits are higher on sales to independently owned retailers and lower on sales in conventional supermarkets and supernatural channels. Approximately 61% of the total net sales in fiscal 2013 were from sales in the conventional supermarket and supernatural channels higher than approximately 60% in fiscal 2012. This change in sales mix from 2012 to 2013 resulted in lower gross margins. In the third quarter of fiscal 2014 reported on Jun 10, the gross margin decline was also due to foreign currency headwinds and poor weather, which obstructed inbound transportations.

Though United Natural has taken the inorganic route to expand its distribution network, customer base and boost long-term growth and increased its market share in the specialty products industry, the company also expects net sales growth in the lower-margin conventional supermarket and supernatural channels to continue to outpace growth in the independent and other channels in fiscal 2014. This signals that the company's margins will be under pressure in fiscal 2014.

Earnings Whispers?

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

Negative Zacks ESP:The ESP for United Natural is -1.54% as the Most Accurate Estimate of 64 cents is lower than the Zacks Consensus Estimate of 65 cents.

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

Other Stocks to Consider

Other stocks in the consumer staples/retail sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Chipotle Mexican Grill, Inc. CMG, with an Earnings ESP of +1.56% and a Zacks Rank #1 (Strong Buy).

BJ's Restaurants, Inc. BJRI, with an Earnings ESP of +15.39% and a Zacks Rank #2 (Buy).

Papa Murphy's Holdings, Inc. FRSH, with an Earnings ESP of + 14.29% and a Zacks Rank #2.

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