Global food products maker and distributor Sysco Corporation (SYY) reported second-quarter fiscal 2013 adjusted earnings (excluding business transformation expenses and one-time items) of 47 cents. Earnings beat the Zacks Consensus Estimate of 40 cents by 17.5% but declined from the prior-year quarter earnings of 49 cents by 4.1% due to modest sales growth and margin pressure. The year-over-year results were also dampened by sluggish macro-economic scenario and weather related headwinds, which in turn led to lower consumer spending.
Quarter in Detail
Sysco's sales grew 4.1% on a year-over-year basis to $11.2 billion in the second quarter of fiscal 2013, driven by 4.3% volume growth (including acquisitions). Acquisitions contributed 2.3% to sales growth, while currency translation decreased sales by 0.6%.
Second-quarter sales lagged the Zacks Consensus Estimate of $11.4 billion. Growth was weaker than 5.7% growth in the first quarter, owing to a difficult consumer spending environment.
Gross profit improved only 0.7% to $2.0 billion in the quarter due to ongoing competitive pressure. Gross margin declined 60 basis points (bps) to 17.48%. Adjusted operating income declined 7.6% in the quarter to $448.6 million due to a 3.4% increase in adjusted operating expenses.
Other Financial Updates
Cash and cash equivalents were $449.9 million at the end of Dec 28, 2013 compared with $359.5 million at the end of Sep 28, 2013. Long-term debt was $2.94 billion at the end of second quarter compared with $2.87 billion at the end of first quarter.
Acquisition Update
On Dec 10, Sysco announced its decision to buy US Foods for approximately $8.2 billion, inclusive of debt. Per the deal, Sysco will pay approximately $3.5 billion, which would include common stock worth $3 billion and $500 million of cash for the equity of US Foods.
In addition, Sysco will also assume the latter’s outstanding debt of about $4.7 billion. The deal has been approved by the boards of both companies and is expected to close in the third quarter of fiscal 2014.
The combined company will create one of the largest food companies in the country. Sysco expects immediate accretion to earnings per share after adjusting for transaction-related costs and amortization of intangibles.
Sysco has secured a fully committed bridge loan to finance the deal and expects to issue a long-term debt to repay the bridge loan. After the completion of the deal, Sysco will receive annual synergies of at least $600 million per annum over the next three or four years.
The deal is expected to be a strategic fit for both Sysco and US Foods, as together they are expected to improve efficiencies, particularly in supply chain, merchandising and general and administrative activities.
We believe that the Sysco-US Foods deal will provide excellent value in an increasingly competitive market. The combined companies are expected to have annualized sales of approximately $65 billion and generate operating cash flow of approximately $2 billion.
We also appreciate the company’s growth strategy and its efforts to reduce costs and improve efficiency. However, we are concerned about rising costs due to fuel price hikes and other inputs, which hurt margins. Sysco holds a Zacks Rank #3 (Hold).
Other better-ranked food companies in the industry include Post Holdings Inc (POST), ConAgra Foods Inc (CAG) and Green Mountain Coffee Roasters Inc. (GMCR). While Post Holdings sports a Zacks Rank #1 (Strong Buy), ConAgra and Green Mountain hold a Zacks Rank #2 (Buy).
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