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Global food products maker and distributor Sysco Corporation (SYY - Analyst Report) reported better-than-expected first-quarter fiscal 2013 adjusted earnings (excluding business transformation expenses and one-time items) of 56 cents. Earnings beat the Zacks Consensus Estimate of 48 cents by 16.7%, but declined from the prior-year quarter earnings of 58 cents by 3.4% 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 led to lower consumer spending.

Quarter in Detail

Sysco's sales grew 5.7% on a year-over-year basis to $11.7 billion in the first quarter of fiscal 2013, driven by 3.0% volume growth (including acquisitions). Acquisitions contributed 2.3% to sales growth, while currency translation decreased sales by 0.5%. First-quarter sales beat the Zacks Consensus Estimate of $11.6 billion.

Gross profit improved marginally by 1.8% to $2.1 billion in the quarter due to ongoing competitive pressure and shift in customer mix. Gross margin declined 68 basis points (bps) to 17.63%. Adjusted operating income, declined 2.7% in the quarter to $478.0 million due to higher adjusted operating expenses.

Other Financial Updates

Cash and cash equivalents were $359.5 million at the end of Sep 28, 2013 compared with $412.3 million at the end of Jun 29, 2013. Long-term debt was $2.87 billion at the end of first quarter compared with $2.64 billion at the end of the fourth quarter.

Our Recommendation

Sysco believes in growing through acquisitions since the company operates in a highly fragmented industry. It intends to achieve 0.5%–1% sales growth 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.

We appreciate the company’s growth strategy 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 JM Smucker (SJM - Analyst Report), TreeHouse Foods Inc. (THS - Snapshot Report) and Pinnacle Foods Inc. (PF - Snapshot Report) all carrying a Zacks Rank #2 (Buy).

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