Sysco's U.S. Foodservice Gains, International Unit Slows Down
Sysco Corporation SYY has seen its shares surge as much as 23.3% in a year, against the industry’s decline of 6.2%. Sysco has long been gaining from strength in its U.S. Foodservice Operations, which continued with its robust performance in the first quarter of fiscal 2019. On the contrary, sales of the company’s International Foodservice Operations witnessed a slowdown in the quarter.
Let’s delve deeper.
U.S. Foodservice Unit: a Major Driver
Sysco’s U.S. Foodservice division has been performing well for quite some time now. In first-quarter fiscal 2019, 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 has been benefitting the company’s U.S. Operations for a while now. Well, a rosy economic scenario marked by elevated consumer confidence and favorable consumer spending is likely to continue working in favor of restaurant sales, thereby driving the U.S. Foodservice segment. The segment constituted more than 60% of the company’s total sales in the first quarter.
What Went Wrong in the International Unit?
Unfortunately, Sysco’s International unit’s performance depicted a slowdown in the first quarter. 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 consumer sentiment is favorable there. However, consumer sentiment is 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.
Moreover, significant international presence exposes Sysco to the risk of adverse currency fluctuations. In fact, foreign exchange fluctuations negatively impacted International segment sales by 0.4% during the first quarter. Persistence of these headwinds is a threat to Sysco’s International unit, that constituted 19.2% of the company’s top line in the first quarter.
The Bottom Line
Nevertheless, Sysco is on track with its strategic priorities that are expected to drive growth and fuel value creation. Talking of strategic priorities, Sysco’s four core strategies include enhancing consumers’ experience, optimizing business, stimulating power of its people and achieving operational efficacy. In this regard, the company focuses 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. We believe that these factors along with solid U.S. division prospects are likely to help this Zacks Rank #3 (Hold) stock sustain its momentum.
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