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Sysco Down 10% in 3 Months: International Unit & Costs Hurt

Zacks Equity Research

A weak international business along with cost hurdles has made matters grim for Sysco Corporation SYY. Such deterrents have kept this Zacks Rank #4 (Sell) stock off investors’ radar, evident from its decline of 10.3% in the past three months compared with the industry’s fall of 8.5%. Let’s take a closer look at the aspects impacting Sysco’s performance and see if there are any possibilities of a revival.

Rising Costs & Weak international Unit

Sysco is witnessing cost inflation that is denting margins. The company encountered cost-related headwinds in the first quarter of fiscal 2019, mainly due to a tight U.S. labor market. Moreover, higher supply-chain expenses related to transport and warehouse are a concern. In fact, warehouse and transportation related costs pose hurdles to the SYGMA unit and the International segment’s Canada region. Further, the company’s International unit incurred higher costs due to increased fuel expenses as well as investments in integration and transformation that are likely to persist. The company expects such costs associated with supply chain to persist, which is a threat to margins.

Apart from these, we note that Sysco’s international unit performance depicted a slowdown in the first quarter of fiscal 2019. Sales in the segment inched up 0.6% to roughly $2,921 million, down from from 7.9% growth in the previous quarter. Management stated that sales from Canada were weaker than expected. Further, consumers’ sentiments were unfavorable in the United Kingdom, with several restaurant closures and adverse impacts from Brexit. Also, a tough operating environment in Mexico hampered Latin America’s performance to an extent. To top this, the company’s international unit is prone to adverse currency fluctuations. In fact, currency fluctuations had a negative impact on sales in the International segment by 0.4% during the first quarter.

Any Hopes of a Revival?

Sysco’s U.S. Foodservice unit has been performing well for quite some time now. Notably, local case volumes in this segment have been rising year over year for 18 consecutive quarters. The upside can be attributed to increased local and national customers. Additionally, rising restaurant sales are boosting U.S. operations. With well-planned strategies to maintain growth, the company expects the segment to deliver strong results and cushion weakness in the international business.

Speaking of other strategic priorities, Sysco is on track with enhancing product assortments, making constant innovations, ensuring food safety and revitalizing brands. Further, to evolve with 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. All said, we expect Sysco’s solid growth initiatives to help the company battle the aforementioned headwinds and revive investors’ optimism.

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