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Sysco's (SYY) Transformation Efforts Aid, Pandemic-Led Woes Hurt

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Sysco Corporation SYY has been battling pandemic-related impacts on its U.S. and International Foodservice operations, as demand for away-from-home food has been low due to increased stay-at-home trends. Nonetheless, the company has been on track with its transformation initiatives. Also, Sysco is focused on providing enhanced services to its customers. Apart from these, strength in the SYGMA unit is an upside. Let’s delve deeper.

Factors Weighing on Sysco

Coronavirus-related hurdles continued to hurt Sysco in second-quarter fiscal 2021, wherein both top and bottom lines deteriorated year over year and missed the Zacks Consensus Estimate. The company posted adjusted earnings of 17 cents per share, which fell short of the Zacks Consensus Estimate of 35 cents. Moreover, the bottom line slumped 80% from the year-ago period’s figure. This year-over-year deterioration can be attributed to reduced sales and margins. Incidentally, Sysco reported sales of nearly $11,559 million, which slid 23.1% year over year and missed the Zacks Consensus Estimate of $11,853 million. Sales declined in both U.S. and International Foodservice segments. Certainly, lower volumes in the food-away-from-home channel have been a deterrent. Increased social distancing has had a considerable adverse impact on the company’s restaurant, education and hospitality customer segments.

Management noted that Sysco’s customers witnessed increased operational constraints during the fiscal second quarter, most significantly in December, when restaurant traffic and sales decreased. Also, the company’s international unit has been battered hard due to tougher limitations in the countries where Sysco operates. Businesses in Europe, Latin America and Canada have been majorly hit by the recent shutdowns, as they are tougher than the U.S. lockdowns. Incidentally, Europe underwent a lockdown in December 2020 and is anticipated to continue being in different degrees of lockdown for a major part of the second half. Management, on its second-quarter call, stated that these hurdles will be overcome week by week and region by region in the next few quarters until the vaccine is extensive and there is stable business recovery.

Apart from these, Sysco has been encountering product cost inflation in the U.S. Foodservice unit for a while now. During the second quarter of fiscal 2021, U.S. Broadline saw a 1.6% product cost inflation, mainly due to dairy and poultry categories, as well as paper and disposables. Gross profit decreased 23.9% to $1,559.3 million, while gross margin remained stable at 19.68%.  Persistence of such trends poses threats to margins.

The Upsides

Sysco is focused on its transformation initiatives. To this end, the company has been committed to becoming more digitally oriented, as part of which its main priority is to enhance its Sysco Shop digital order platform, among other efforts. The proportion of orders placed via Sysco Shop kept rising considerably throughout the second quarter. Also, the company’s new pricing software is underway in the first test market, with plans to be rolled out across the country. Moving on, Sysco has been on track with its next priority, which is concentrating on transforming its sales model and making it more customer-centric. This includes transforming the sales structure to be more focused, coordinating sales force incentives more closely with the company’s business goals and enhancing the partnership of sales teams across its different business lines. Management said that its sales transformation process is working well, with team-based selling gaining traction. Finally, Sysco concluded regionalizing its field leadership structure at the second-quarter beginning, which is likely to enhance its efficiency.

Additionally, Sysco has been focused on removing structural fixed costs. The company is making solid progress with regard to eliminating annualized permanent fixed costs of about $350 million from its business in fiscal 2021. Apart from these savings, management had earlier outlined other cost-reduction opportunities, which are expected to deliver savings fiscal 2022 onward.
 
Further, Sysco has been committed to supporting its customers amid the crisis, as part of which its Restaurants Rising program is worth noting. In connection with this, management announced plans to remove minimum delivery requirements in November 2020. Further, the company, in its second-quarter earnings call, said that it doesn’t intend to remove delivery service days during the second wave of the pandemic. Though these actions might inflate expenses for the company, it is likely to support customers’ operations. Sysco is also focused on investing in its people, as part of which it is purposely retaining its drivers even after witnessing volume declines in December. This is likely to ensure their availability at the time of volume recovery. Again, this is likely to flare up the company’s transportation costs in the short term but is expected to be beneficial over the long run.

Impressively, Sysco’s SYGMA segment has been performing well, of late. Sales in this unit rose 4% to $1.5 billion in the second quarter of fiscal 2021, on the back of the success of national and regional quick-service restaurants catering to drive-through traffic. Notably, this represented the second straight quarter of sales improvement in this unit. Management continues to witness new business wins in this unit and remains encouraged about the overall growth.

Shares of this Zacks Rank #3 (Hold) company have gained 6.8% in the past three months compared with the industry’s growth of 9%.

Solid Food Stocks

Sanderson Farms, Inc. SAFM, currently sporting a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 43.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The J.M. Smucker SJM has a Zacks Rank #2 (Buy) and its bottom line outpaced the Zacks Consensus Estimate by 17.7% in the trailing four quarters, on average.

United Natural UNFI has a Zacks Rank #2 and its bottom line outpaced the Zacks Consensus Estimate by 13.6% in the trailing four quarters, on average.

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