Global food products maker and distributor Sysco Corporation’s SYY second quarter of fiscal 2016 earnings beat estimates on margin improvement. Revenues lagged the consensus mark by a slight margin, due to currency headwind.
Adjusted earnings of 48 cents per share beat the Zacks Consensus Estimate and the prior-year earnings by 17.1%. Marginal growth in sales and improved gross margin led to the growth.
Quarter in Detail
Sysco's sales of $12.154 billion missed the Zacks Consensus Estimate of $12.174 billion by 0.2%, but grew a marginal 0.6% on a year-over-year basis in the second quarter of fiscal 2016, as volume growth was offset by unfavorable currency impact of 1.7%. Case volume for the company's U.S. Broadline operations grew 3.9%, while local case growth within U.S. Broadline operations grew 3%. Acquisitions contributed 0.4% to sales growth.
Gross profit improved 3.4% to $2.2 billion in the quarter, while gross margin improved 50 basis points to 17.75% due to the company’s ongoing growth strategy, which focuses on accelerating sales, reducing costs and mitigating ongoing gross margin pressure. Adjusted operating income also increased 10.2% in the quarter to $437 million despite a 1.8% increase in adjusted operating expenses. Food cost deflation was 1.2%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 $595.6 million at the end of Dec 26, 2015, compared with $388.3 million at the end of Sep 26, 2015. Long-term debt was $4.27 billion at the end of the second quarter compared with $3.00 billion at the end of the first quarter.
Our Take
We are impressed by the fact that Sysco has delivered higher gross margins for the last three 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 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 food cost deflation.
Sysco has a Zacks Rank #4 (Sell).
Better-ranked food companies in the industry include Pinnacle Foods Inc. PF, ConAgra Foods Inc. CAG and The J.M. Smucker Company SJM. All of them carry a Zacks Rank #2 (Buy).
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