Sysco's (SYY) Recipe for Growth Bodes Well Amid High Costs
Sysco Corporation SYY has been benefiting from its Recipe for Growth program, which is strengthening the company’s capacities across sales and the supply chain. The company’s diversified business and gains from acquisitions have also been a driver.
However, the food company is battling cost inflation like several other industry players.
Let’s delve deeper.
Recipe for Growth & Other Drivers
Sysco is progressing well with its Recipe for Growth and invested operating expenses of $67 million in the same in the fourth quarter of fiscal 2022, especially for enhancing the supply chain. The Recipe for Growth program involves five strategic priorities aimed at enabling the company to grow 1.5 times faster than the market by FY24 end.
The five strategic pillars include enhancing customers’ experiences via digital tools. In this regard, the company’s Sysco Shop platform and the new pricing software are working well. Further, the company is focused on improving the supply chain to cater to customers efficiently and consistently with better delivery and omnichannel inventory management.
Sysco aims at providing customer-oriented merchandising and marketing solutions to augment sales. The company also targets having team-based selling, with an emphasis on important cuisines. Finally, Sysco is focused on cultivating new capacities, channels and segments alongside sponsoring investments via cost-saving initiatives.
Sysco is a diversified company, which covers every part of the food away from home market. The company’s operations are diversified across different customer types, product categories and geographies.
Sysco caters to restaurants of all price-point spectrums and types. It also caters to health care and education facilities alongside travel and recreation facilities in office buildings. Travel and recreation facilities are seeing a continued revival and are likely to be a growth area in the coming years.
Sysco targets growing at 1.35 times the industry in fiscal 2023, which will keep it on track to grow at 1.5 times the industry in fiscal 2024. It expects top-line growth of at least 10% in fiscal 2023, which will help Sysco surpass the annual sales mark of $75 billion for the first time.
Management expects acquisitions to contribute to its growth. In fiscal 2023, Sysco envisions adjusted earnings per share (EPS) of $4.09 to $4.39. The midpoint of this range suggests a 30% increase from the adjusted EPS in fiscal 2022. The midpoint of the guidance indicates adjusted EBITDA of about $4 billion.
Cost Headwinds Persist
Sysco has been encountering product cost inflation in the U.S. Foodservice unit for a while now. In the fourth quarter of fiscal 2022, U.S. Broadline saw 15.3% product cost inflation, mainly due to the poultry, fresh produce and dairy categories.
In fiscal 2023, management expects inflation in the mid-single digits across all categories, which is likely to moderate from the high single digits in the first quarter to the low single digits in the fourth quarter of fiscal 2023. Sysco also expects increased operating costs in the fiscal due to transformation investments and a tough hiring landscape.
Other Players Grappling With Inflation
Many consumer staple companies are bearing the brunt of cost inflation.
For instance, Church & Dwight CHD has been battling major cost hurdles. CHD expects to witness additional cost inflation of $135 million in 2022, $50 million higher than its earlier expectations.
Church & Dwight stated that incremental inflation is mainly associated with raw and packaging materials as well as the pass-through of similar costs from third-party manufacturers.
B&G Foods BGS has been battling cost inflation, which is weighing on its gross margin. On its last earnings call, management at BGS stated that it expects the input cost inflation to have a considerably industry-wide effect in the remainder of fiscal 2022.
B&G Foods expects to keep seeing significant cost inflation for inputs, such as ingredients, packaging, labor and transportation, due to factors like the pandemic, the Ukraine war, weather conditions, supply-chain hurdles and the shortage of labor.
Flowers Foods FLO is battling major hurdles due to cost inflation and supply-chain bottlenecks. In the second quarter of fiscal 2022, FLO’s materials, supplies, labor and other production costs (excluding depreciation and amortization) escalated by 240 basis points (bps) to 51.9%. This resulted from increased ingredient and packaging expenses, which led the gross margin to contract 240 bps to 48.1%.
Flowers Foods expects inflation to reach its peak in the third quarter.
Coming back to Sysco, the abovementioned upsides are likely to help the company battle inflationary challenges and stay on the growth path.
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