Intro

We wrote about Unifi, Inc. (NYSE:UFI) in March this year after the company's second-quarter numbers when we maintained our 'Hold' rating in the recycled and synthetic product manufacturer. Shares are trading flat since our March commentary roughly 16 weeks ago. After digesting the company's latest third-quarter earnings report (announced on the 8th of May), we are reiterating our 'Hold' rating in UFI, although green shoots look like they are finally beginning to form.

As we see from Unifi's technical chart below, although negative GAAP earnings of -$0.57 per share on revenues of $149 million were reported for the third quarter this year, investors liked what they heard on the earnings call, resulting in a brief rally above the stock's 200-day moving average, almost reaching $6.80 a share in the process. In June, we saw the stock give away practically all of those Q3 post-earnings gains but the key now (from an investor's standpoint) is that the recent May lows hold over the near term. Given the market cap of the stock (Approximately $103 million), the strong levels of insider buying that took place last year are noteworthy (see below). Suffice it to say, insiders see value in the stock below $6 a share so it will be interesting to see if shares can finally rally off present multi-year lows.

Sales Rose Sequentially In Q3

We have stated in previous commentary that external conditions (especially concerning the apparel destocking argument) would have to improve over a sustained period for investors to start buying the stock once more. Although quarterly tallies this year remain up against stiff 2023 comparables, sales in Q3 hit $149 million, a solid 9% increase over Q2 with improving core fundamental trends developing in the Americas, Brazil & Asia.

Market share gains were seen in both the Americas & Asia due to the operations of Unifi's biggest competitor in these markets having come to a halt. Although volumes fell in Asia as a result of the Chinese New Year falling in the third quarter, volumes rose in North America as well as Brazil. Sales transformation efforts also continue to gain traction.

Repreve Fibre Sales Continue Growing

As we see below, sales of Repreve Fibre continued their sequential growth in Q3, reporting $46.8 million in sales for the quarter. Given how the recycling industry continues to gain traction on a global scale and the fact that 40+ billion plastic bottles have already been transformed by Unifi into fresh recycled fiber demonstrates that Unifi's 'Repreve' technology has already significant momentum on its side. Management on its recent Q3 earnings call touched on how marketing initiatives concerning Repreve continue to gain ground where the word is getting out on how something as simple as used plastic bottles can be transformed into tangible products at scale.

Margins Continuing To Improve

Gross profit came in at $4.8 million in Q3, a $3.2 million increase over the second quarter. Although the Americas continues to report negative gross profit, Unifi's largest segment had the most marked improvement in profitability in the quarter. Gross profit in the Americas improved to -$3.5 million in Q3, up from -$6.7 million in the previous quarter. The positive trend overall in the quarter was margin improvements as costs continue to be eeked out of the system with sales transformation initiatives also boosting profitability. Suffice it to say, given that the Americas contributed 62% of top-line sales in Q3 ($91.1 million), one would think that this segment must return to positive profitability before Unifi stock can go on a sustained bullish run.

The difference between positive & negative profitability in the Americas is crucial for the following reasons. As Unifi is currently reporting trailing gross profit margins of only a smidge above 2%, it is imperative that the company's inventory can be turned over at a faster clip than in recent times. Now, given that Unifi has battened down the hatches in recent times (concerning investing spend) to control costs, this business model at its core is not sustainable as the company will not grow.

However, if external conditions continue to improve (resulting in capital being turned over faster), then more cash flow can be generated as a result, which would ensure that sustained investment back into the company can finally be accelerated.

Valuation Remains Very Attractive

The lack of positive earnings & cash flow as we see below in Unifi is always a concern when valuing companies. However, we would point investors to how cheap Unifi's assets (P/B) & sales (P/S) are compared to the sector median as well as the company's historic averages. Furthermore, given the recent trends discussed above such as rising sales & growing profitability, it should not be long before the company is reporting positive earnings & cash-flow multiples once more. Suffice it to say, given that a company's earnings & cash flow are always derived from its assets & sales, cheap assets (P/B of 0.37) & cheap sales (P/S of 0.18) should mean more earnings to Unifi over time, all things remaining equal.

Conclusion

Therefore, to sum up, although reiterating our 'Hold' rating in Unifi, we are becoming more confident that a confirmed multi-year low is not too far away. Encouraging technicals (where recent May lows are holding firm), growing sales & earnings & strong insider buying all point to a bullish intermediate golden cross (bullish crossover of the company's 10-week moving average above its 40-week counterpart) in the not-too-distant future. Let's see what the fourth quarter numbers reveal in August. We look forward to continued coverage.