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Sysco's U.S. Foodservice Unit Aids Growth, Costs on the Rise

Zacks Equity Research

Sysco Corporation SYY is well poised on strength of its U.S. Foodservice operations along with its strategy for 2020 and focus on acquisitions. These upsides have helped the company lift investors’ confidence in the stock that was otherwise troubled by escalated costs and a not so impressive International unit performance.

Well, Sysco’s shares have gained 4.2% in the past three months, against the industry’s decline of 2.4%. So, let’s delve deeper and see if this Zacks Rank #3 (Hold) company’s growth drivers can help it stay firm amid the hurdles. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What’s Driving Sysco?

Sysco’s U.S. Foodservice unit has been performing well for quite some time now. The robust trend continued in second-quarter fiscal 2019, wherein sales advanced year over year, mainly buoyed by strength in U.S. Foodservice operations. Sales in this division advanced 4.2% to $10.1 billion, where local case volumes within U.S. Broadline operations increased 3.3% (including organic sales growth of 2.4%) and total case volumes ascended 2.9% (wherein organic sales increased 2%). Notably, local case volumes in this segment have been rising year over year for 19 consecutive quarters now. Additionally, rising restaurant sales have been benefitting the company’s U.S. operations for a while.

Further, Sysco has been carrying out various acquisitions over the years to expand its distribution network and customer base, and boost long-term growth. To this end, Sysco announced a deal to acquire Waugh Foods, which is a Central Illinois distributor. This is likely to strengthen Sysco’s existing portfolio. Prior evidences in this regard include the buyouts of HFM in Hawaii, Doerle Food Service in Louisiana and Kent Frozen Foods in the U.K. Previous moves in this regard include the acquisitions of Supplies on the Fly, North Star Seafood, Gilchrist & Soames and 50% stake in Mexico-based Pacific Star Foodservice, among others.

Sysco Corporation Price, Consensus and EPS Surprise

Sysco Corporation Price, Consensus and EPS Surprise | Sysco Corporation Quote

Sysco is also progressing well with its strategy for 2020. The company’s key plans include enhancing consumers’ experience, optimizing business, stimulating power of its people and achieving operational efficacy. 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 consumer preferences, Sysco is committed toward investing in technology and enhancing e-commerce operations. The company also plans to improve supply chain, increase transparency, enhance deliveries and manage product costs effectively.

Can Upsides Offset Hurdles?

Sysco has been encountering cost-related headwinds for a while. During the second quarter of fiscal 2019, operating expenses in the U.S. Foodservice unit escalated 4.7% on account of increased supply-chain costs across warehouse and transportation. Further, Sysco battled high costs in its Other segment, owing to continued tariff impacts and higher shipping expenses. The company’s International unit also battled supply-chain hurdles in the U.K. These factors along with elevated interest expenses and increased investment costs (especially in the international unit) led Sysco’s bottom line to decline 4% year over year in the second quarter. Well, rising costs are a concern for many food companies like TreeHouse Foods THS, General Mills GIS and Campbell Soup CPB, among others.

Coming back to Sysco, the company’s International unit continues to deliver a mixed performance. While sales remained strong in Canada, consumer sentiment in the U.K. continued to be affected by Brexit-related worries in the second quarter. This hurt the company’s top-line performance, and also remains a concern for the forthcoming periods.

Nonetheless, Sysco’s cost-reduction efforts and strong U.S. Foodservice unit prospects are likely to provide cushion against such hurdles. Notably, a rosy economic scenario, marked by a strong labor market, has led to a decently solid consumer confidence level. This is likely to continue working in favor of restaurant sales, thereby being a driver for the U.S. Foodservice segment.

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