Global food products maker and distributor Sysco Corporation SYY reported in-line first quarter of fiscal 2016 earnings. Revenues beat the consensus mark by a slight margin, probably due to volume growth.
Adjusted earnings of 52 cents per share matched the Zacks Consensus Estimate and the prior-year earnings. Marginal growth in sales and improved gross margin were offset by a decline in adjusted operating income.
Quarter in Detail
Sysco's sales of $12.563 billion beat the Zacks Consensus Estimate of $12.540 billion by 0.2% and also grew a marginal 0.9% on a year-over-year basis in the first quarter of fiscal 2016, as volume growth was offset by unfavorable currency impact of 2%. Case volume for the company's U.S. Broadline operations grew 3.4%, while local case growth within U.S. Broadline operations grew 2%. Acquisitions contributed 0.4% to sales growth.
Gross profit improved 2.3% to $2.2 billion in the quarter, while gross margin improved 23 basis points to 17.81% due to the company’s ongoing growth strategy, which focuses on accelerating sales, reducing costs and mitigating ongoing gross margin pressure.
Adjusted operating income declined 0.5% in the quarter to $506 million due to a 3.1% increase in adjusted operating expenses. Food cost deflation was 0.2% as the company witnessed deflation in the dairy, meat, poultry and seafood categories, partially offset by modest inflation in other categories.
Other Financial Updates
Cash and cash equivalents were $388.3 million at the end of Sep 26, 2015, compared with $5.13 billion at the end of Jun 27. Long-term debt was $3.00 billion at the end of the first quarter compared with $2.27 billion at the end of the fourth quarter.
On Sep 23, 2015, Sysco priced $2 billion of senior notes at a weighted average coupon of 3.59%. The proceeds were used to execute the $1.5 billion accelerated stock repurchase program (ASR) and pay down $500 million of commercial paper. The ASR resulted in the repurchase of 32 million shares of Sysco stock on Sep 28, 2015.
Our Take
We are impressed by the fact that Sysco has delivered higher gross margins in the last two consecutive quarters, after witnessing declining gross margins since the last two fiscal years due to multiple factors. It seems that the company’s growth strategy is paying off and its efforts to boost sales and margins are bearing fruits.
The company’s sales have also improved consistently 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.
Sysco has a Zacks Rank #3 (Hold).
Better-ranked food companies in the industry include Flower Foods Inc. FLO, B&G Foods Inc. BGS and Lancaster Colony Corp. LANC. All of them sport a Zacks Rank #1 (Strong Buy).
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