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Global food products maker and distributor Sysco Corporation (SYY - Analyst Report) reported better-than-expected third quarter fiscal 2013 earnings. Adjusted earnings (excluding business transformation expenses and one-time items) of 49 cents beat the Zacks Consensus Estimate of 42 cents by 16.7%.

The adjusted earnings however lagged the prior-year quarter earnings of 50 cents by 2.0%. The results were impacted 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 4.0% on a year-over-year basis to $10.9 billion in the third quarter of fiscal 2013, driven by 1.7% volume growth (including acquisitions). Acquisitions contributed 1.8% to sales growth, while currency translation decreased sales by 0.1%. Third quarter sales missed the Zacks Consensus Estimate of $11.1 billion.

Gross profit increased 2.1% to $1.9 billion, driven by strong sales. Adjusted operating income however declined 4.4% in the quarter to $470.5 million due to higher adjusted operating expenses.

Other Financial Updates

Cash and cash equivalents were $331.5 million at the end of Mar 30, 2013 compared with $320.8 million at the end of Dec 29, 2012. Long-term debt was $2.56 billion at the end of third quarter compared with $2.8 billion in the prior 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 company has a number of acquisitions at various stages of processing at the moment.

The acquisition environment is currently favorable and the company has a number of potential opportunities in the pipeline. To date in fiscal year 2013, the company has already acquired a total of 9 companies, whose aggregate annual revenues are 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 favorable stocks in the retail and wholesale sector that are worth considering. These include Green Mountain Coffee Roasters Inc (GMCR - Analyst Report), Kroger Company (KR - Analyst Report) and Sears Holding Corp (SHLD - Analyst Report), all of them carrying a Zacks Rank #1 (Strong Buy).

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