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Sysco (SYY) Q3 Earnings: Can Core Strategies Pare Cost Woes?

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Sysco Corporation (SYY - Free Report) ) is slated to release third-quarter fiscal 2018 results on May 7. This provider of food and related products has outperformed the Zacks Consensus Estimate by an average of 1.1% in the trailing four quarters, with a beat in each quarter. Let’s see if Sysco can keep this positive streak alive this time around as well.

Sysco Corporation Price and EPS Surprise
 

Sysco Corporation Price and EPS Surprise | Sysco Corporation Quote

 

U.S. Food Service Unit & Strategy for 2020: Major Drivers

We expect Sysco to continue gaining from strength at its U.S. Foodservice segment as well as its focus on achieving growth via acquisitions. These factors and solid cost-savings efforts helped the company retain its robust past record in the last reported quarter. Notably, Sysco’s second-quarter fiscal 2018 results marked its fourth straight quarter of sales beat, whereas earnings have outpaced the Zacks Consensus Estimate in eight of the past nine straight quarters. Results in the quarter were mainly backed by strength in the company’s U.S. Foodservice Operations, wherein restaurant sales continued to grow and compensated for soft traffic. Further, local case volume within U.S. Broadline operations rose 4.8% and total case volumes jumped 3.5%. Notably, local case volumes in this segment has been rising year over year for 15 consecutive quarters. Management expects a stronger second half, wherein it also anticipates favorable results from its International segment.

In the third quarter analysts polled by Zacks expect sales from U.S. Foodservice and International units to grow 5.7% and 8.3% to $9,761 million and $2,739 million, respectively. The Zacks Consensus Estimate for overall sales is pegged at $14,382 million, up from $13,524 million recorded in the year-ago period.

Apart from this, we also remain encouraged about Sysco’s focus on its strategy for 2020, as it gives out positive signals for the quarter to be reported as well. Sysco’s 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 assortments, making constant innovations, ensuring food safety and revitalizing brands. Further, to evolve with the changing consumer preferences, Sysco remains committed toward investing in technology and enhancing e-commerce operations. This is evident from the recent launch of its redesigned website, which is aimed at enhancing consumers overall experience. Moreover, it plans to improve supply chain, increase transparency, enhance deliveries and attain operational efficiency. Further, we commend Sysco’s focus on acquisitions, which are expected to drive sales and also enhance Sysco’s presence in international markets.

Will Cost Hurdles be Offset?

However, Sysco has been witnessing year-over-year contraction in gross margin for the past two quarters. In second-quarter fiscal 2018, the company continued to bear the brunt of higher inbound freight costs, which stemmed from driver availability challenges in the industry. Segment-wise, the U.S. Broadline unit gross margin was marred by food cost inflation of 3.3%, owing to categories like meat, dairy and produce. The International segment was hurt by food cost inflation in the U.K., driven by higher product costs and currency movements.

Also, the company incurred higher costs in Europe due to constant investments in transformation endeavors. Moreover, weakness in pound sterling resulted in acute food cost inflation in the United Kingdom, thereby hurting volumes and margins. Further, adjusted operating income for the International segment tanked 28.8% to $79 million. Persistence of these hurdles remains a threat to Sysco’s International performance.

Nevertheless, we expect Sysco’s robust cost-saving initiatives and other growth endeavors to help offset these hurdles in the to-be reported quarter. Moreover, the company envisions annual savings of roughly $200-$300 million from the recent tax reforms, which is likely to fuel the bottom line by 9-13 cents in the second half. Given these factors, along with the progress of its cost-savings plan, Sysco remains well placed to deliver a solid third quarter. The consensus estimate for third-quarter earnings is pegged at 64 cents, which marks a solid 25.5% improvement from 51 cents recorded in the year-ago period. This estimate has remained stable over the past 30 days.

What the Zacks Model Unveils

Further, our proven model doesn’t show that Sysco is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Sysco has an Earnings ESP of +0.63%, the company currently carries a Zacks Rank #4 (Sell). We usually caution against sell-rated stocks going into earnings announcement.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Coty Inc. (COTY - Free Report) a Zacks #3 Ranked stock, has an Earnings ESP of +0.68%. You can see the complete list of today’s Zacks #1 Rank stocks here.

J. M. Smucker (SJM - Free Report) , a #3 Ranked company, has an Earnings ESP of +0.48%.

Church & Dwight (CHD - Free Report) has an Earnings ESP of +0.52% and a Zacks Rank of 3.

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