On Mar 13, 2014, we issued an updated research report on Sysco Corporation (SYY). This global food products maker and distributor recently reported mixed second-quarter fiscal 2014 results on Feb 3.
Sysco reported second quarter fiscal 2014 earnings of 47 cents, which beat the Zacks Consensus Estimate by 17.5%. In fact, Sysco has been performing impressively delivering positive earnings surprises in the last four quarters.
However, earnings declined 4.1% year over year due to modest sales growth and margin pressure. The year-over-year results were also dampened by a weak economic environment and negative currency translation. Though revenues increased 4.1% year over year helped by acquisitions and volume growth, it missed the consensus mark.
Amid the challenging macroeconomic environment, the company’s long term fundamentals are solid. The company’s growth strategy remains strong and its efforts to reduce costs and improve efficiency are appealing. The company has implemented several short-term steps and longer term strategic initiatives to accelerate sales and mitigate the ongoing gross margin pressure.
These actions are gaining traction and the company expects to see gradual improvement in these areas through the balance of 2014 and beyond. The company also expects additional progress in productivity over the next several months.
Moreover, Sysco’s acquisition deal with US Foods, as announced in Dec 2013, will create one of the largest food companies in the country and is expected to improve efficiencies. Sysco expects immediate accretion to earnings per share after adjusting for transaction-related costs and amortization of intangibles.
However, despite adequate positives, Sysco has been witnessing declining gross margins since the last two fiscal years due to multiple factors. The slow rate of recovery in the foodservice market has created competitive pricing pressure for its products, which is in turn negatively impacting gross profits. Sales of its locally-managed business, which includes independent restaurant customers, have not grown at the same rate as sales to regional and national customers, leading to gross margin decline.
In addition, market conditions continue to be challenging for many customers and competitive pressure has been acute in the first half of fiscal 2014. These conditions were amplified in Dec 2013 by a shortened holiday shopping season and severe weather in several parts of the country.
Sysco now carries a Zacks Rank #4 (Sell).
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