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Sysco Gains on US Foodservices Unit & Buyouts, Costs a Woe

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Sysco Corporation SYY has been growing on strength in the U.S. Foodservice channel. This combined with well-planned buyouts and effective three-year financial strategies have enabled the renowned marketer and distributor of food products to stay competitive and hold a leading market share.

Soaring U.S. Foodservices

Sysco boasts a strong U.S. Foodservice network, mainly stemming from surge in local case volumes within U.S. Broadline operations. In fact, local case volumes in this segment have been improving year over year for 16 consecutive quarters. Additionally, rising restaurant sales has been driving the company’s U.S. operations for a while. Driven by such factors, sales in the U.S. Foodservice Operations advanced 5.1% during the third quarter of fiscal 2018 on 2.6% growth in local case volumes and 2.4% rise in total case volumes.

Acquisitions Aid Expansion

Sysco’s buyouts have played a vital role in enhancing business span, more specifically to widen distribution network. Apart from strengthening its base in the United States, the company also undertakes acquisitions internationally to bolster overseas business. In this regard, Sysco closed its Kent Foods buyout deal during the third quarter and expects the same to bolster the U.K. and European business bandwagon. During the third quarter, the company concluded the acquisitions pertaining to Hawaii-based HFM FoodService and Louisiana-based Doerle Food Service. Incidentally, the HFM buyout aided the company’s U.S. Broadline operations in the said period.

In prior developments, Sysco’s acquisition of London-based Brakes Group in July 2016 is noteworthy and management is well on track with its integration process.  Apart from these, the company’s buyout efforts include Supplies on the Fly, North Star Seafood, Gilchrist & Soames, as well as stakes in Mayca Distribuidores and Pacific Star Foodservice.

 



 

Strategies for 2020 Bode Well

Sysco is on track with its three-year financial goals which mainly focuses on enhancing consumers’ experience, optimizing business, stimulating power of its people and achieving operational efficiency. 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 consumers’ 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.

Driven by these strategies, the company witnessed local case growth and improved gross profit in the third quarter. Further, management believes that the company is well placed to achieve adjusted operating income improvement in the higher end of its targeted range of $600-$650 million.

Final Thoughts

In spite of the aforementioned growth drivers, Sysco has been witnessing year-over-year contraction in gross margin since the past three quarters, thanks to higher inbound freight costs. Driver availability challenges in the industry have led to increase in freight costs. Further, during the third quarter, the company’s U.S. Broadline operations were hurt by food cost inflation, while rising prices stemming from product costs and currency translations in the U.K. marred international segment performance. Persistence of such headwinds continues to be a threat to Sysco’s performance in the forthcoming periods. Notably, other consumer staples companies such as McCormick & Company MKC, Church & Dwight Co. CHD and TreeHouse Foods THS have also been struggling with higher commodity costs.

On the bright side, we are impressed with Sysco’s acquisition and efficiency boosting strategies that have been yielding favorably. In fact, such aspects have raised investors’ optimism on this Zacks Rank #3 (Hold) stock, evident from its 16.4% rally in a year, while the industry fell 16%. Moreover, we are hopeful that Sysco’s cost-management strategies will offset the negative impacts stemming from cost-related hurdles in the forthcoming periods. With such positives embedded, Sysco is likely to continue in investors good books.

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

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