Sysco Corporation SYY has been off investors’ radar lately, as this Zacks Rank #4 (Sell) stock has tumbled 11.5% in the past three months, wider than the industry’s decline of 7.6%. We note that the company has been battling cost-related hurdles for quite some time. Also, the company’s international performance witnessed a slowdown in the last reported quarter.
Nevertheless, Sysco’s U.S. Foodservice unit is a major area of strength. Also, the company is progressing quite well with its strategies for 2020. That said, let’s see if these endeavors can help this renowned food player revive in 2019.
Hurdles in Sysco’s Path
Sysco has long been witnessing cost inflation, which has been denting its margins. The company encountered cost-related headwinds in the first quarter of fiscal 2019, mainly due to a tight U.S. labor market. Moreover, gross margin in this segment contracted 7 basis points (bps) to 20.10%, caused by a fall in food-cost inflation in U.S. Broadline, particularly due to meat, poultry and produce category deflation. During the quarter, operating expenses in the U.S. Foodservice unit increased 5.8%, owing to higher supply-chain expenses related to both transport and warehouse. In fact, warehouse and transportation related costs also posed concerns to the company’s SYGMA unit and the International segment’s Canada region.
The company’s International unit also incurred increased costs related to investments in integration and transformation, which is likely to linger. Further, increased fuel costs led to escalated U.S. Foodservice unit operating expenses, which also included overtime costs and other costs related to additional hiring, owing to a tight labor market. The company expects its warehouse and transportation costs associated with supply chain to persist, which is a threat to margins.
Apart from this, Sysco’s international unit’s performance depicted a slowdown in the first quarter of fiscal 2019. Segment sales climbed 0.6% to roughly $2,921 million, reflecting a sharp fall from 7.9% growth witnessed in the previous quarter. Results were quite mixed in the first quarter. Management stated that sales from Canada were weaker than expected, though consumers’ sentiments are favorable there. However, consumers’ sentiments are unfavorable in the U.K., with several restaurant closures and Brexit-related worries.
Also, a tough operating environment in Mexico hampered Latin America’s performance to an extent, though it was somewhat compensated by solid performance in Costa Rica. The company is focused on combining Brake France and Davigel, which should help it utilize the scale of these businesses and deliver accelerated growth. However, these activities entail high integration costs.
Efforts to Aid Revival
Sysco’s U.S. Foodservice unit has been performing well for quite some time now. The robust trend continued in first-quarter fiscal 2019, wherein earnings and sales advanced year over year, mainly buoyed by strength in U.S. Foodservice operations. Sales in this division advanced 5.6% to $10,399.4 million, where local case volumes within U.S. Broadline operations climbed 5.2% (including organic sales growth of 3.7%) and total case volumes ascended 5.7% (wherein organic sales increased 4.3%). Total case volumes gained from increased local and national customers. Notably, local case volumes in this segment have been rising year over year for 18 consecutive quarters now.
Additionally, rising restaurant sales have been benefitting the company’s U.S. operations for a while. Well, a rosy economic scenario, marked by elevated consumers’ confidence and favorable consumer spending, is likely to continue working in favor of restaurant sales, thereby being a driver for the U.S. Foodservice segment. While the company expects supply-chain related headwinds to persist, it is on track with its strategic priorities that are expected to drive growth and fuel value creation.
Talking of strategic priorities, Sysco is on track with its four core plans, which include enhancing consumers’ experience, optimizing business, stimulating power of its people and achieving operational efficacy. In this regard, the company is focused on enhancing assortments, making constant innovations, ensuring food safety and revitalizing brands. Further, to evolve with the changing consumer preferences, Sysco is committed toward investing in technology and enhancing e-commerce operations. Moreover, it plans to improve supply chain, increase transparency, enhance deliveries and manage product costs effectively. Also, the company’s solid balance sheet and free cash flow augmenting ability will help it make business investments, continue with mergers and acquisitions, make share buybacks, provide adequate dividends and repay debt.
All said, we expect Sysco’s solid growth initiatives to help the company battle the aforementioned headwinds and aid regaining investors’ confidence.
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McCormick & Company MKC has long-term earnings per share growth rate of 9% and a Zacks Rank #2.
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