Sysco Corporation SYY is set to report fiscal fourth-quarter 2015 results before the opening bell on Aug 10. Last quarter, this global food products maker and distributor posted a negative surprise of 2.44%.
Let’s see how things are shaping up prior to the announcement.
Factors to Consider This Quarter
Sysco has been consistently showing improvement in sales driven by acquisitions and volume growth. Though the termination of the long-awaited merger agreement with US Foods in June was disappointing, the company still remains positive on the acquisition front and expects to move forward with more such deals. However, the company expects earnings to remain under pressure due to currency headwinds and declining gross margin.
Sysco has been witnessing declining gross margins since the last three fiscal years (including fiscal 2015) 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 have restricted consumer spending in the food-away-from-home market, thus impacting sales and gross profit.
Higher poultry costs also remain a drag on the company’s operating profit, thereby hurting earnings growth.
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 encouraging. The company also expects share buybacks to boost earnings in the to-be-reported quarter.
Earnings Whispers?
Our proven model does not conclusively show that Sysco is likely to beat earnings this quarter. This 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:The ESP for Sysco is 0.00% as both the Zacks Consensus Estimate and Most Accurate Estimate stand at 52 cents per share.
Zacks Rank #3 (Hold): Sysco has a Zacks Rank #3, which 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.
Stocks to Consider
Stocks in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Campbell Soup Company CPB, with an Earnings ESP of +2.38% and a Zacks Rank #2 (Buy).
Dean Foods Company DF, with an Earnings ESP of +3.85% and a Zacks Rank #2.
The J. M. Smucker Co. SJM, with an Earnings ESP of +3.28% and a Zacks Rank #3.
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