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Global food products maker and distributor Sysco Corporation (SYY - Analyst Report) reported better-than-expected fourth quarter fiscal 2013 adjusted earnings (excluding business transformation expenses and one-time items) of 59 cents. Earnings beat the Zacks Consensus Estimate of 55 cents by 7.3%, but declined from the prior-year quarter earnings of 63 cents by 6.3% due to weak restaurant traffic. The year-over-year results were also dampened by sluggish macro-economic scenario and weather related headwinds, which in turn were reflected in lower consumer spending.

Quarter in Detail

Sysco's sales grew 5.0% on a year-over-year basis to $11.60 billion in the fourth quarter of fiscal 2013, driven by 3.0% volume growth (including acquisitions). Acquisitions contributed 2.1% to sales growth, while currency translation decreased sales by 0.1%. Fourth quarter sales missed the Zacks Consensus Estimate of $11.62 billion.

Gross profit increased 1.2% to $2.0 billion in the quarter, but the growth was very marginal due to ongoing competitive pressure and shift in customer mix. Adjusted operating income however declined 7.3% in the quarter to $564.7 million due to higher adjusted operating expenses.

Fiscal 2013 Results

Sysco’s fiscal 2013 adjusted earnings of $2.14 per share, exceeded the Zacks Consensus Estimate of $1.86 per share by 15.0% but declined from the prior-year quarter earnings of $2.15 cents by 0.5%.

Sales grew 4.8% on a year-over-year basis to $44.41 billion in fiscal 2013, driven by 2.6% volume growth (including acquisitions) and 1.5% benefits from acquisitions. However, fiscal 2013 sales missed the Zacks Consensus Estimate of $44.46 billion.

Other Financial Updates

Cash and cash equivalents were $412.3 million at the end of Jun 29, 2013 compared with $331.5 million at the end of Mar 30, 2013. Long-term debt was $2.64 billion at the end of fourth quarter compared with $2.56 billion at the end of the third quarter.

Our Recommendation

Sysco believes in growing through acquisitions since the company operates in a highly fragmented industry. It intends to achieve sales growth of 0.5% to 1% through acquisitions in the long term. The acquisition environment is currently favorable and the company has a number of acquisitions at various stages of processing at the moment. To date in fiscal year 2013, the company has already acquired a total of 9 companies, whose aggregate annual revenues is over $750 million.

We appreciate the company’s strategy of growth through acquisitions and its efforts to reduce costs and improve efficiency. However, we are concerned about rising costs due to fuel price hikes and other inputs, which hurt margins.

Sysco holds a Zacks Rank #4 (Sell). However, there are other stocks in the retail and wholesale sector that are worth considering. These include Green Mountain Coffee Roasters Inc (GMCR - Analyst Report), Nash Finch Co and United Natural Foods Inc (UNFI - Analyst Report). While Green Mountain and Nash Finch carry a Zacks Rank #1 (Strong Buy), United Natural holds a Zacks Rank #2 (Buy).

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