On Jan 16, 2014, we issued an updated research report on Sysco Corporation (SYY). This global food products maker and distributor reported better-than-expected first-quarter fiscal 2015 results on Nov 11.
Sysco reported adjusted earnings of 52 cents in the first quarter, beating the Zacks Consensus Estimate of 50 cents by 4% and prior-year earnings by 6.1%. An improvement in sales made up for the ongoing cost pressure.
Sysco's sales grew 6.2% on a year-over-year basis to $12.445 billion in the first quarter of fiscal 2015, driven by 2.3% volume growth (including acquisitions). First-quarter sales marginally beat the Zacks Consensus Estimate of $12.36 billion by 0.7%.
Gross profit improved 6% to $2.2 billion in the quarter, while gross margin declined 4 basis points to 17.6% due to the ongoing cost pressure.
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 has also compounded gross margin pressure. High food costs have restricted consumer spending in the food-away-from-home market, thus impacting sales and gross profit.
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. We expect to see gradual improvement in these areas through 2015. The company also expects additional progress in productivity over the next several months.
In addition, Sysco’s acquisition deal with US Foods for $8.2 billion, as announced in Dec 2013, is pending and is currently undergoing a regulatory review process by the Federal Trade Commission. If approved, the deal will create one of the largest food companies in the country. The merger will give Sysco increased size and scale and will also provide significant cost savings opportunities.
Sysco carries a Zacks Rank #2 (Buy).
Key Picks from the Sector
Investors interested in the food industry can also consider stocks like Supervalu Inc. (SVU), J&J Snack Foods Corp. (JJSF) and Burcon Nutrascience Corp. (BUR). While Supervalu sports a Zacks Rank #1 (Strong Buy), J&J Snack and Burcon Nutrascience hold a Zacks Rank #2.
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