<p>Consumer -- Health, Wellness and Lifestyle<br/>Healthy Living Monthly<br/>New trends for the new year<br/>Sales trends decelerate 400 basis point in core channel during Nov./Dec.<br/>Based on our channel checks following the holidays, we believe sales growth<br/>decelerated 400 basis points in the core natural/organic channel. Throughout 2008,<br/>sales growth of natural/organic in the mass market softened and the premium channel<br/>suffered weakening traffic, while the core independent retailer channel produced robust<br/>comps. Comps in the independent channel appeared to weaken in early November as<br/>even the core consumer began to safeguard her cash and conserve.<br/>Retailers and distributors reduce inventory to improve cash flow<br/>Retailers in almost all consumer categories are reducing inventories, many to conserve<br/>cash in anticipation of a protracted period of softer sales. We believe UNFI has also<br/>begun to cut inventories, after having built inventory to facilitate two new facility<br/>openings. We believe that UNFI will be taking inventory levels down below the level<br/>where it operated prior to building inventory and is embarking on longer-term plan to<br/>improve ROIC through more efficient operations and working capital management. The<br/>declining retail/distributor inventories could lead to incremental soft manufacturer<br/>trends in calendar Q1 vs. Q4.<br/>Estimates reduced across most of the group<br/>We are reducing our sales growth forecasts across the group by 400+ basis points. On<br/>average, we are now estimating about 5% internal growth for the sector vs. 10-15% a<br/>year ago. Only SMBL is unaffected by this revision, as would be expected given its<br/>limited exposure to the core natural/organic channel. EPS reductions are generally<br/>greater than the sales reductions, with the exception of UNFI, which is immaterially<br/>given lower fuel and interest costs mitigate the impact.<br/>UNFI and SMBL are our best near-term ideas<br/>Given its cost situation and our expectations for a dramatic improvement in free cash<br/>generation over the next four quarters, UNFI is our top pick in the group currently.</p><p>Inside<br/>Consumer indices 14<br/>Our coverage universe 17<br/>Report card performance 18<br/>In the news 21<br/>Short interest 23<br/>Insider transactions 24<br/>Company updates 25</p><p></p><p>
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