We expect Sysco Corporation SYY to beat expectations when it reports fiscal third-quarter 2015 results before the opening bell on May 4.
Last quarter, this leading U.S. food distributor delivered in-line earnings. The company had reported in-line earnings in two of the last four quarters and beaten the Zacks Consensus Estimate in the other two, which translates to an average positive surprise of 1.51%.
Let’s see how things are shaping up for this announcement.
Factors to Consider This Quarter
We are encouraged by the fact that the company is consistently showing improvement in sales driven by acquisitions and volume growth. However, currency headwinds and declining gross margin have put pressure on earnings.
Sysco has been witnessing declining gross margins since the last two fiscal years due to multiple factors. The slow rate of recovery in the foodservice market has created competitive pricing pressure for its products, which in turn is negatively impacting gross profits. Sales of its locally-managed business, which includes independent restaurant customers, have not grown at the same rate as sales to regional and national customers. Gross margin rate for regional and national customers is generally lower than other types of customers. This unfavorable mix of consumers is thus hurting margins. Inflation is also adding to gross margin pressure. High food costs has restricted consumer spending in the food-away-from-home market, thus impacting sales and gross profit.
Though the category management initiative has helped the company to manage gross margin performance, it expects the pressure to continue in the coming quarters.
Amid the challenging macroeconomic environment, the company’s growth strategy remains strong and its efforts to accelerate sales, reduce costs and mitigate the ongoing gross margin pressure are appealing. We expect to see gradual improvement in these areas through 2015. The company also expects additional progress in productivity over the next several months.
We are currently looking forward to Sysco’s merger with US Foods for $8.2 billion. The deal, which was announced in Dec 2013, is currently undergoing a regulatory review process by the Federal Trade Commission.
Earnings Whispers?
Our proven model does not conclusively show that Sysco is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: Earnings ESP for Sysco is 0.00% as both the Zacks Consensus Estimate and Most Accurate Estimate stand at 41 cents per share.
Zacks Rank: Sysco has a Zacks Rank #3 (Hold), which is when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Other stocks in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Energizer Holding, Inc. ENR with an Earnings ESP of +2.33% and a Zacks Rank #3.
Tyson Foods, Inc. TSN with an Earnings ESP of +1.37% and a Zacks Rank #3.
Treehouse Foods Inc. THS with an Earnings ESP of +1.72% and a Zacks Rank #3.
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