Sysco (SYY) Grapples With Cost Inflation & Soft Industry Trends
Sysco Corporation SYY has been grappling with tough macroeconomic trends, product cost inflation, escalating operating costs and expenses, as well as foreign currency headwinds.
The current Zacks Rank #4 (Sell) player has a market capitalization of $37.2 billion. In the past year, the stock lost 14.5% against the industry’s 5.8% growth.
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Let’s discuss the factors that might continue to take a toll on the firm.
Soft Industry Trend: Sysco experienced soft macroeconomic trends in March, including soft traffic. This put pressure on the company’s volumes, which, in turn, affected sales. Despite improvement, soft industry trends are likely to linger in the fourth quarter of fiscal 2023, which might affect its performance.
Steep Costs and Expenses: The company has been witnessing product cost inflation in the U.S. Foodservice unit for a while now. In the third quarter of fiscal 2023, the company witnessed product cost inflation of 4.9%, measured by estimated changes in product costs, mainly in the dairy and frozen categories.
In the same period, its cost of sales and operating expenses recorded increases of 11.2% and 8.7%, respectively. Sysco expects low single-digit inflation in the fiscal fourth quarter. Escalation in operating costs and expenses, if not controlled, might continue to affect SYY’s margins and profitability in the quarters ahead.
Stiff Competition: Sysco operates in a highly fragmented and competitive foodservice distribution industry. Thus, the company has been subject to competition from several local, regional and multi-regional distributors. The company has not been able to undertake effective pricing actions, despite rising input costs, due to the volatile and price-sensitive demand for its food-away-from-home products. In addition, rising competition from commercial wholesale markets, which have a lower cost structure, has been creating pricing pressure and remains a threat to its margins.
Currency Woes: Given its widespread presence in international markets, Sysco is exposed to unfavorable foreign currency movements. In the fiscal third quarter, the company’s International Foodservice operations contributed 17.7% of its total revenues. However, in the quarter, foreign exchange headwinds had an adverse impact of 1.2% and 1.3% on the overall top line and gross profit, respectively. A stronger U.S. dollar might depress SYY's overseas business results in the quarters ahead.
Southbound Estimate Trend: In the past 60 days, the Zacks Consensus Estimate for fiscal 2023 and fiscal 2024 earnings have been revised down by 1.2% and 1.8%, respectively.
Key Picks
Some better-ranked stocks are Ingredion Incorporated INGR, Nomad Foods Limited NOMD and Conagra Brands, Inc. CAG.
Ingredion is a producer and distributor of sweeteners, nutrition ingredients and biomaterial solutions. The Zacks Consensus Estimate for INGR’s current financial-year earnings per share is expected to rise by 22.1% from the corresponding year-ago reported figure.
Ingredion currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Nomad Foods, sporting a Zacks Rank #1, manufactures and distributes frozen foods. NOMD has a trailing four-quarter earnings surprise of 8.5%, on average.
The Zacks Consensus Estimate for Nomad Foods’ current financial year sales suggests growth of 8%, while earnings are likely to decline 3.4% from the prior-year reported numbers.
Conagra Brands operates as a leading branded food company in North America. The Zacks Consensus Estimate for CAG’s current financial-year sales and earnings per share suggests growth of 7.1% and 17%, respectively, from the corresponding year-ago reported figures.
Conagra, currently carrying a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 13.2%, on average.
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