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Sysco Gains on Solid U.S. Foodservice Unit Amid High Costs

Zacks Equity Research

Sysco Corporation SYY is well positioned on the back of its robust growth initiatives. Focus on strategy for 2020 and strength in the U.S. Foodservice segment are some of the factors driving the company’s results amid cost inflation and mixed International unit’s performance. Markedly, shares of the company have rallied close to 20% year to date, outpacing the industry’s growth of 14.7%.

Let’s delve deeper.   

Factors Narrating Sysco’s Growth Story

Sysco’s U.S. Foodservice unit has been performing well for quite some time now. The robust trend continued in fourth-quarter fiscal 2019, wherein sales at this division advanced 2.8% to $10,696 million. Local case volumes within U.S. Broadline operations inched up 1.4% (including organic sales growth of 1.3%) and total case volumes rose 0.4% (wherein organic sales increased 0.3%). Notably, local case volumes in this segment have been rising year over year for 21 consecutive quarters now. Clearly, a favorable economic scenario marked by a strong labor market is likely to continue working in favor of restaurant sales, thereby boosting the U.S. Foodservice segment.

Sysco is on track with its four core strategies — enhancing consumers’ experience, optimizing business, stimulating the 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. Also, the company plans to improve the supply chain, increase transparency, enhance deliveries and manage product costs effectively.

Sysco’s focus on acquisitions is also helping it expand its distribution network and customer base. To this end, it announced the buyout of J. Kings Food Service Professionals last week. In April, the company took over sister firms — J & M Wholesale Meats and Imperio Foods. Earlier, it had also announced a deal to acquire Waugh Foods. Such prudent buyouts are expected to strengthen Sysco’s distribution network.

Will Hurdles be Offset?

Sysco’s International unit’s performance was mixed throughout fiscal 2019. Segment sales slipped 0.8% to roughly $2,924 million in the fourth quarter of fiscal 2019. Foreign exchange fluctuations hurt sales by 0.8% during the quarter. While sales remained strong in Canada, performance in France was hurt by integration endeavors related to Brake France and Davigel. Continuation of such trends is a concern for the division.

Also, like various other food companies such as Campbell Soup CPB, Conagra Brands CAG and TreeHouse Foods THS, Sysco has been encountering cost-related headwinds for a while. During the fourth quarter of fiscal 2019, the U.S. Foodservice unit was somewhat hurt by food-cost inflation of nearly 2.5% in U.S. Broadline, particularly in categories like meat, poultry and produce. Also, adjusted operating expenses rose 4.9% on account of higher supply chain and labor costs across warehouse and transportation. Persistence of such elevated costs poses threats to margins.

Nonetheless, we believe that cost-saving initiatives and other robust strategies will help this Zacks Rank #3 (Hold) company counter the hurdles and keep its impressive show on.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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