Sysco Corporation SYY has been grappling with a challenging macroeconomic backdrop, product cost inflation, escalating operating expenses and foreign currency headwinds for a while now. These factors are likely to impede its performance in the quarters ahead.
The Zacks Rank #5 (Strong Sell) player has a market capitalization of $35.6 billion. In the past six months, the stock has lost 4.7% compared with the industry’s 4.4% decline.
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Let’s discuss the factors that might continue taking a toll on the firm.
Weak Industry Trend: Sysco has been witnessing slower overall industry market volume growth due to the inflationary environment and rising interest rates. Although Sysco’s size and scale advantages and solid balance sheet position it for growth in fiscal 2024, the company anticipates the market to grow at a lower rate than in fiscal 2023. This is expected to put pressure on the company’s volumes, which might adversely impact its top-line performance.
High Operating Costs and Expenses: The company has been subject to product cost inflation in the U.S. Foodservice unit over the past few quarters. For instance, the company witnessed product cost inflation of 4.9% and 2.1% in the third and fourth quarters of fiscal 2023, respectively. The metric is measured by estimated changes in product costs, mainly in the frozen, canned and dry categories. In the fiscal fourth quarter, its operating expenses rose by 1.9% year-over-year.
In fiscal 2023, Sysco’s cost of sales and operating expenses increased by 10.8% and 9%, respectively. The company expects its International segment to remain inflationary in fiscal 2024. A rise in operating costs and expenses, if not controlled, might affect SYY’s margins and profitability in the coming quarters.
High Tax Rate: For fiscal 2024, Sysco anticipates the tax rate to be approximately 24.5%, compared with 23% recorded in fiscal 2023. A higher tax rate might hurt the company’s bottom line in fiscal 2024.
Foreign Exchange Headwinds: Sysco has been subject to unfavorable foreign currency movements, given its strong presence in international markets. In the fiscal fourth quarter, revenues from SYY’s International Foodservice operations accounted for 18.5% of its total revenues. However, in the quarter, foreign exchange headwinds adversely impacted the overall top line and gross profit by 0.2% and 0.1%, respectively. A stronger U.S. dollar might further depress its overseas business results moving ahead.
Estimate Revisions: In the past 60 days, the Zacks Consensus Estimate for fiscal 2024 and fiscal 2025 earnings has been revised down by 3.8% and 3.3%, respectively.
Some Solid Staple Bets
Some better-ranked stocks in the same space are Inter Parfums IPAR, Helen of Troy HELE and Grocery Outlet GO.
Inter Parfums, which manufactures, markets and distributes a range of fragrances and fragrance-related products, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Inter Parfums’ current financial-year sales indicates 19.7% growth from the year-ago reported figure. IPAR has a trailing four-quarter earnings surprise of 45.9% on average.
Helen of Troy, a provider of several consumer products, currently has a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for Helen of Troy’s fiscal 2025 sales suggests growth of 2.2% from the year-ago reported number. HELE has a trailing four-quarter earnings surprise of 8.1%, on average.
Grocery Outlet, the extreme value retailer of quality, name-brand consumables and fresh products, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for Grocery Outlet’s current financial-year sales and earnings suggests growth of 11.2% and 4.9%, respectively, from the year-ago reported numbers. GO has a trailing four-quarter earnings surprise of 14.3%, on average.
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