United Natural Foods (UNFI)

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Headquartered in Dayville, Connecticut, United Natural Foods, Inc. (UNFI) is the leading domestic distributor of natural and organic products, providing over 40,000 stock keeping units (SKUs) to more than 17,000 customers. The products include: grocery and general merchandise (52% of the portfolio), produce/perishables (15%), frozen foods (13%), bulk and food service products (8%), nutritional supplements and sports nutrition (7%), and personal care items, regional, national, and private brands (5%). Customers include independently owned natural product retailers (44% of revenues in fiscal 2007) supernatural chains (37%), comprising small and large chains of natural foods supermarkets mass markets (15%), situated across the U.S. foodservices (2%) and others (2%). The company's largest customer is Whole Foods Market, which represents 28% of total sales, while Wild Oats Markets currently accounts for 9% of revenues. Whole Foods Market has been a major customer since 1996. In October 2006, the company renewed the primary distribution agreement with Whole Foods Markets until September 2013. During the third quarter of fiscal 2004, a five-year distribution agreement with Wild Oat Markets, Inc. was also renewed. The company also owns and operates a few retail natural product stores, located primarily in Florida. United Natural Foods' strategy includes an active acquisition program in order to benefit from economies of scale. Since 1985, the company has completed several acquisitions, including Select Nutrition Distributors in December 2004 and Milkbrook Distribution Services in November 2007. Select Nutrition is a supplier of branded vitamins, herbs, dietary supplements, and health and beauty aids to health food stores, pharmacies, practitioners, sports clubs, and spas.

United Natural Foods is a growth company in a growth industry. The $46 billion Natural Products sector is growing 8% versus 2% for the overall grocery industry. The company's top-line is expanding at double-digit rates, driven by acquisitions, organic growth initiatives, and incremental distributor agreements. National purchasing power and key relationships with leading natural products retailers are two of the company's key competitive strengths. For instance, in October 2006, the company signed a seven-year primary distribution agreement with Wild Oats Markets, which added the Southern Pacific region of Whole Foods, which includes Southern California, Arizona and Southern Nevada. Management believes the amended agreement, along with other new business gained in the first fiscal quarter of 2007, should add an incremental $95 million to $105 million in sales on an annualized basis. In addition, the company claims to have the highest service levels in the natural products industry, with over 98% order fulfillment rates and a capability for fast delivery. The company also enjoys competitive market share with total market share having increased to 8.3% in fiscal 2005 from 6.9% in the year-earlier period.

Investments in people, facilities, equipment, and new technologies are expected to enhance the company franchise as the leading U.S. natural foods distributor. Since fiscal 2001, the company has spent almost $150 million in distribution capacity and infrastructure improvements, which has improved capacity by 124%. Between fiscal 2005 and fiscal 2007, management embarked on a three-year, $133 capital expenditure. The company upgraded four facilities and in January 2006 completed the construction of the distribution facility in Greenwood, Indiana. In late 2007, the company completed the construction of a 352,000 square foot distribution facility in Sarasota, Florida and a facility in Portland, Oregon. Management expects total distribution capacities to increase by 105% as the company improves the efficiencies in the newly completed facilities. Though transitional costs were incurred, the new state-of-the-art distribution facility in Rocklin, (northern) California is the largest in the company's national distribution network with 237,000 square feet. The new facility enhances the company's distribution capabilities, which in turn lowers costs, enables better customer service, and improves product diversity. Also, management reduced fuel costs and enhanced productivity through the implementation of new technologies, such as pick-to-light and pick-to-voice technologies.

Management is committed to enhancing shareholder value. In December 2004, the Board authorized the repurchase of up to $50 million worth of the company's shares (approximately 4.5% of the outstanding common stock). The authorization initiated the company's first stock repurchase program. During fiscal 2006, the company repurchased 228,800 shares of common stock for $6.1 million. No shares were repurchased in fiscal 2007. The proceeds from the sale of the vacant buildings at the California facility are expected to be utilized to pay down debt.

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