Sysco 2Q Beats on Top Line

Global food products maker and distributor Sysco Corporation ( SYY - Snapshot Report ) reported better-than-expected second quarter fiscal 2013 earnings. Adjusted earnings (excluding business transformation expenses and restructuring charges) of 49 cents, beat the Zacks Consensus Estimate of 41 cents by 19.5%.

The adjusted earnings also exceeded the prior-year quarter earnings of 47 cents by 4.3%. The upswing in the results was driven by solid top-line growth, gains from acquisitions, prudent expense management and moderating input cost environment.

Quarter in Detail

Sysco's sales grew 5.4% on a year-over-year basis to $10.8 billion in the second quarter of fiscal 2013, driven by 2.8% volume growth (including acquisitions). Acquisitions contributed 1.1% to sales growth, while currency translation increased sales by 0.3%. Second quarter sales also beat the Zacks Consensus Estimate of $10.7 billion.

Gross profit increased 3.9% to $1.9 billion, driven by strong sales. Adjusted operating income increased 4.6% in the quarter to $485.7 million, despite higher adjusted operating expenses.

Acquisition Update

Sysco completed the acquisition of four independent foodservice companies in Dec 2012, whose combined aggregate annual revenues amounted to $520 million in fiscal 2012. These companies are as follows:

• Appert’s Foodservice in St. Cloud, Minnesota
• Buchy Food Service, in Greenville, Ohio
• Central Seafood Company, in Orlando, Florida
• Distagro, the foodservice division of Montreal, Quebec-based grocery retailer, Metro Richelieu Inc.

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 over the long term. To date in fiscal year 2013, the company has already acquired a total of 9 companies, whose aggregate annual revenue is over $750 million.

Other Financial Updates

Cash and cash equivalents were $320.8 million at the end of Dec 29, 2013 compared with $548.4 million at the end of Sep 29, 2012. Long-term debt was flat at $2.8 billion in the quarter as compared with the prior quarter.

Sysco holds a Zacks Rank #3 (Hold).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.

Other stocks in the food industry worth considering are Green Mountain Coffee Roasters, Inc ( GMCR - Analyst Report ) carrying a Zacks Rank #1 (Strong Buy) and Core-mark Holding ( CORE - Snapshot Report ) and Natural Grocers ( NGVC - Snapshot Report ) , both holding a Zacks Rank #2 (Buy).