Sysco Beats Q1 Earnings on Volume Growth, Acquisitions
Global food products maker and distributor Sysco Corporation (SYY) reported first-quarter fiscal 2015 adjusted earnings of 52 cents. Earnings beat the Zacks Consensus Estimate of 50 cents by 4% and also increased 6.1% year over year as an improvement in sales made up for the ongoing cost pressure.
Sysco Corporation - Earnings Surprise | FindTheBest
Quarter in Detail
Sysco's sales grew 6.2% on a year-over-year basis to $12.445 billion in the first quarter of fiscal 2015, driven by 2.3% volume growth (including acquisitions). Acquisitions contributed 0.6% to sales growth, while currency translation decreased sales by 0.5%. The company stated that the improved performance was partly attributable to the benefits realized from the portfolio of business transformation initiatives, especially category management.
First-quarter sales marginally beat the Zacks Consensus Estimate of $12.356 billion by 0.7%. Sales also improved from fiscal 2014, which recorded growth of 5.9%, 3.2%, 4.1% and 5.7% in the fourth, third, second and first quarters, respectively.
Gross profit improved 6% to $2.2 billion in the quarter, while gross margin declined 4 basis points to 17.59% due to the ongoing cost pressure. Adjusted operating income climbed 5.9% in the quarter to $509 million despite a 6% increase in adjusted operating expenses. Adjusted operating margin was almost flat at 4.1% in the quarter.
Sysco-US Foods Merger Update
Sysco’s merger with US Foods is currently undergoing a regulatory review process by the Federal Trade Commission and is not expected to consummate before the first quarter of calendar year 2015. Sysco agreed to buy US Foods in Dec 2013 for approximately $8.2 billion, inclusive of debt. Sysco is the second largest player in the foodservice distribution industry.
Other Financial Updates
Cash and cash equivalents were $384.9 million as of Sep 27 compared with $413.0 million at the end of Jun 28, 2014. Long-term debt was $2.65 billion at the end of first quarter fiscal 2015 as against $2.38 billion at the end of the fourth quarter fiscal 2014.
Our Take
We are encouraged by the fact that the company is consistently showing improvement in sales driven by acquisitions and volume growth. However, currency headwinds and declining gross margin have put pressure on earnings.
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 in turn is 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.
Gross margin rate for regional and national customers is generally lower than other types of customers. This unfavorable mix of consumers is thus hurting margins. Inflation is also adding to gross margin pressure. High food costs has restricted consumer spending in the food-away-from-home market, thus impacting sales and gross profit.
Amid the challenging macroeconomic environment, the company’s growth strategy focuses on accelerating sales, reducing costs and mitigating the ongoing gross margin pressure. We expect to see gradual improvement in these areas through 2015.
Sysco has a Zacks Rank #3 (Hold).
Some better-ranked food companies in the industry include Post Holdings Inc (POST), McCormick & Co. Inc. (MKC) and The Hain Celestial Group Inc. (HAIN). All of them hold a Zacks Rank #2 (Buy).
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