Pressure on Gross Margin Turns United Natural Bearish

Pressure on Gross Margin Turns United Natural Bearish
June 9, 2016

 
The shares of United Natural Foods, Inc. (NASDAQ:UNFI), the leading US distributor of organic foods, has risen about 18% so far this week. The main reason attributed to the increase in the share price is the fiscal 2016 third-quarter earnings that exceeded the analysts’ estimates. However, the third-quarter revenue fell short of The Street estimates. Due to the reasons given below, the share price, which closed at $43.18 on Wednesday, is expected to decline when the market comes to terms with the earnings report.

During the fiscal 2016 third-quarter, the company reported revenue of $2.13 billion, which was below the analysts’ estimates of $2.17 billion. In the similar period of fiscal 2015, United Natural recorded revenue of $2.11 billion.
The third-quarter net income of the company declined to $38.27 million or $0.76 per share, from $41.75 million or $0.83 million per share in the corresponding period last year. The third quarter earnings, however, surpassed the analysts’ estimates of $0.66 per share.

During the third-quarter, on a y-o-y basis, the gross margin of the company declined 25 basis points to 15.1%. Pricing competition continues to affect the margin of United Natural.

The Providence, Rhode Island-based company also gave its guidance for the fiscal 2016. For the full year, the retailer anticipates net sales ranging between $8.46 billion to $8.50 billion. The guidance includes revenue of $160 million from the recent acquisitions (Nor-Cal, Global Organic, and Haddon House). This translates to a minuscule growth of 3.4% to 3.8% on a y-o-y basis.

The GAAP earnings are anticipated to decrease to a range of $2.39 to $2.45 per share, compared to GAAP earnings of $2.76 per share in the fiscal 2015. Excluding costs, the non-GAAP earnings are also expected to fall in a range between $2.47 and $2.53 per share, from $2.85 per share in the similar period of 2015. Thus, considering the third-quarter decline in the earnings and the weak outlook, we can expect the share price to fall sooner.

The stock was consolidating at 35 levels for the past six months. Following the results, the share price rose till the next resistance at 45. The RSI reading of 65 indicates that the stock would be soon entering the overbought zone. Thus, the share price can be expected to decline to re-test the support at 38.

United Natural Foods - Technical Analysis - 9th June 2016

So, to take advantage of the probable decline in price, a binary trader should buy a one touch put option at this point in time. The strike price of the binary option contract should be $38 or higher. An expiry date in the first week of July would considerably mitigate the risk.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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