Sysco Corporation SYY appears to be investors’ preferred pick, as evident from its solid bull run. This distributor and marketer of food products has seen its shares gain 16.6% in the past six months, when the industry was down 0.6%. The company's impressive growth initiatives have been driving solid results over the past years.
However, the company’s European business remains pressurized, thus posing a concern for Sysco’s international performance. Nonetheless, the company’s recently outlined core strategies for 2020 which reflect its strong prospects. So, let’s take a closer look at Sysco’s driving factors and see if they can help the company retain its solid record despite the hurdles.
Core Strategies for 2020 Bode Well
Sysco recently outlined its key growth strategies at its New York Investor Day event, wherein it also highlighted its three-year financial goals. Sysco stated that its four core strategies include enhancing consumers’ experience; optimizing business; stimulating power of its people and achieving operational efficacy. In this regard, the company remains focused on enhancing its assortments, undertaking innovations, ensuring food safety and revitalizing its brands.
Management believes that these game plans will help it achieve its financial goals for fiscal 2020. The company expects gross profit to rise in a range of 55-65%, while it anticipates reducing administrative expenses by 20-25%. Consequently, the company plans to achieve adjusted operating income growth of about $650-$700 million by fiscal 2020 end, reflecting a three-year CAGR of 9%. Moreover, the company envisions earnings per share to grow at a double-digit rate on an average, by 2020.
Focus on Acquisitions
The company has been carrying out various acquisitions over the years to grow its distribution network and customer base and boost long-term growth. Other than sales growth, these acquisitions also enhance its presence in international markets and its product portfolio. In this regard, Sysco recently acquired Hawaii-based HFM FoodService, which will be added to the company’s U.S. Foodservice segment. Other moves in this regard include the buyout Supplies on the Fly; North Star Seafood, Gilchrist & Soames and 50% stake in Mexico-based Pacific Star Foodservice among others.
Cost-Cutting Initiatives to Enhance Margins
Sysco has been impressively managing expenses since the past few years. In the supply chain area, the company is witnessing positive momentum from its productivity initiatives and ongoing process improvements, which are driving efficiencies specifically in the warehouse. The company achieved $417 million operating income growth since fiscal 2015 and remains on track to achieve the high end of the three-year adjusted operating income growth target of approximately $600 million to $650 million through the end of FY18.
Splendid Surprise History
Sysco began fiscal 2018 on a strong note, as both top and bottom lines grew year over year and surpassed the Zacks Consensus Estimate in the first quarter. While this marked Sysco’s third straight quarter of sales beat, earnings have outpaced the Zacks Consensus Estimate in seven out of the past eight straight quarters now. Results were mainly backed by strength in the company’s U.S. Foodservice Operations despite the dismal impact of hurricanes.
European Weakness Raises Concerns for International Performance
Sysco’s International performance remained mixed in the first quarter, mainly due to softness in Europe — which is battling sluggish restaurant traffic and an overall slowdown in Food Away From Home in the United Kingdom. Moreover, weakness in pound sterling resulted in acute food cost inflation in the United Kingdom, thereby leading to pricing pressure. This, in turn hurt volume growth and gross margin in the first quarter. Unfortunately, management expects these headwinds to linger throughout fiscal 2018, which remains a threat to Sysco’s International performance.
Further, Sysco generates significant business from its international operations, which are spread across Canada, Europe and Latin America. Evidently, sales from its International Foodservice operations constituted about 20% of the company’s total revenue in the first quarter. Thus, the company remains prone to the risk of unfavorable currency translations
Nevertheless, management expects its domestic business to be buoyed by increased consumer demand and traffic. Given these factors, along with the progress of its cost-savings plan, this Zacks Ran #3 (Hold) company remains well placed to witness another solid year.
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Conagra Brands, Inc. CAG, with a long-term EPS growth rate of 7% carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Nomad Foods Limited NOMD, also with a Zacks Rank #2, has surpassed earnings estimates in the past three quarters.
Flowers Foods, Inc. FLO with a long-term EPS growth rate of 6.1% holds the same Zacks Rank as Conagra and Nomad Foods.
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