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Sysco Up 40% in a Year: Can Momentum Sustain Amid Cost Woes?

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Sysco Corporation (SYY - Free Report) has been a preferred pick for investors, courtesy of strength in its U.S. Foodservice operations as well as focus on strategies for 2020. Driven by such upsides, shares of this food products company have gained close to 40% in a year, against the industry’s dip of 0.6%. However, Sysco has been grappling with strained margins for a while now owing to cost inflation.



Let’s delve deep and see if Sysco’s growth initiatives can help it counter these woes and sustain the Zacks Rank #3 (Hold) company’s robust momentum.  

U.S. Foodservice Business a Key Driver

Sysco’s U.S. Foodservice unit has been performing well for quite some time now, with the trend continuing in fourth-quarter fiscal 2018. During the quarter, both earnings and sales advanced year over year. Notably, sales in the U.S. Foodservice division advanced 6.1% to $10,407.6 million with local case volumes up 5% (including organic sales growth of 3%), whereas total case volumes ascended 5.3% (wherein organic sales increased 3.5%).  Notably, local case volumes in this segment have been rising year over year for 17 consecutive quarters now.

Additionally, rising restaurant sales have been benefitting the company’s U.S. Operations for a while.  Well, a rosy economic scenario, marked by a strong labor market and favorable consumer spending, has been favoring restaurant sales. We also note that Sysco’s International segment performed well in the quarter, which helped the company conclude the fiscal on a strong note. In fact, with fourth-quarter results, the company marked the successful completion of its three-year (FY15-FY18) financial plan, wherein it surpassed certain goals. During this three-year period, the company achieved local case growth of 3%, adjusted gross profit CAGR of 4.2% and adjusted operating income CAGR of 11.1%.

Focus on Core Strategies

Sysco remains on track with its key growth strategies, which were outlined at its New York Investor Day event in December 2017. These 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. Moreover, the company plans to improve supply chain, increase transparency, enhance deliveries and manage product costs effectively.

Will Cost Inflation Impede Growth?

Sysco has been witnessing year-over-year contraction in gross margin for the past four quarters. In fourth-quarter fiscal 2018, gross margin contracted 9 basis points (bps) to approximately 19%, driven by declines in U.S. Foodservice segment. U.S. Foodservice gross margin fell 18 bps on account of U.S. Broadline food cost inflation of about 1% stemming from cost inflation in dairy, frozen potatoes & vegetables, and paper & disposables categories. Also, the company continues to bear the brunt of higher inbound freight costs owing to driver availability challenges in the industry. Incidentally, escalated fuel and supply-chain costs led to a rise in adjusted operating expenses in this segment. Additionally, the International segment was negatively impacted by inflation that resulted from product costs and unfavorable currency movements in the U.K.

Nevertheless, we expect Sysco’s aforementioned drivers along with its concentration on prudent buyouts to provide cushion to these hurdles and help the company remain in investors’ good books.

Looking for More Promising Stocks? Check These

Medifast (MED - Free Report) , with a Zacks Rank #1 (Strong Buy), delivered positive earnings surprise in the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chefs’ Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 22%, carries a Zacks Rank #2 (Buy).

Pinnacle Foods has long-term earnings per share growth rate of 8% and a Zacks Rank #2.

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