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Sysco's (SYY) Recipe for Growth Bodes Well Amid Cost Woes

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Sysco Corporation (SYY - Free Report) has been benefiting from its Recipe for Growth program, which is strengthening the company’s capacities across sales and the supply chain. Sysco’s diversified operations have also been an upside. Moreover, gains from acquisitions have been strengthening the company’s brand portfolio.

That said, SYY has been battling cost inflation. On its second-quarter earnings call, management lowered its bottom-line guidance for fiscal 2023. Let’s delve deeper.

Factors Working Well

Sysco’s Recipe for Growth program involves five strategic priorities aimed at enabling the company to grow 1.5 times faster than the market by FY24 end. The five strategic pillars include enhancing customers’ experiences via digital tools. In this regard, the company’s Sysco Shop platform and the new pricing software are working well. Further, SYY is focused on improving the supply chain to cater to customers efficiently and consistently with better delivery and omnichannel inventory management.

Sysco aims at providing customer-oriented merchandising and marketing solutions to augment sales. The company also targets having team-based selling, with an emphasis on important cuisines. Finally, Sysco is focused on cultivating new capacities, channels and segments alongside sponsoring investments via cost-saving initiatives.

SYY has been carrying out various acquisitions over the years to grow its distribution network and customer base and boost long-term growth. In February 2022, the company concluded the acquisition of The Coastal Companies, which operates under Sysco’s specialty produce business – FreshPoint. Before this, the company acquired Greco and Sons in the first quarter of fiscal 2022. We note that these acquisitions go in tandem with Sysco’s Recipe for Growth.

Sysco Corporation Price, Consensus and EPS Surprise

Sysco Corporation Price, Consensus and EPS Surprise

Sysco Corporation price-consensus-eps-surprise-chart | Sysco Corporation Quote

Cost Woes Hurt

Sysco has been encountering product cost inflation in the U.S. Foodservice unit for a while now. In the second quarter of fiscal 2023, the company witnessed product cost inflation of 8.3%, which was measured by estimated changes in product costs, mainly in the dairy, frozen food and fresh produce categories. The persistence of such trends poses threats to margins.

Management’s updated view for fiscal 2023 includes factors, such as softer-than-originally-planned market volumes, greater-than-planned operating costs, solid margin management and gross profit per case and lower corporate expenses. Management stated that the third quarter is usually the lowest volume quarter, while the fourth quarter is the highest volume quarter.

Sysco now expects earnings per share (EPS) in the band of $4-$4.15, suggesting 23-28% growth from the year-ago period. On its first-quarter earnings call, management guided adjusted EPS in the range of $4.09-$4.39 for fiscal 2023, suggesting 26-35% growth. The guidance includes the expectations of macroeconomic volatility and a potential decline in food-away-from-home demand.

Wrapping Up

Sysco is a diversified company, which covers every part of the food-away-from-home market. The company’s operations are diversified across different customer types, product categories and geographies.

Sysco caters to restaurants of all price-point spectrums and types. It also caters to health care and education facilities alongside travel and recreation facilities in office buildings. Travel and recreation facilities are seeing a continued revival and are likely to be a growth area in the coming years.

We believe that these upsides are likely to work well for Sysco amid cost headwinds. Shares of this Zacks Rank #3 (Hold) company have climbed 1.5% in the past six months compared with the industry’s increase of 10.9%.

Solid Consumer Staple Picks

Some better-ranked consumer staple stocks are Lamb Weston (LW - Free Report) , General Mills (GIS - Free Report) and Conagra Brands (CAG - Free Report) .

Lamb Weston, which operates as a frozen potato product company, currently sports a Zacks Rank #1 (Strong Buy). LW has a trailing four-quarter earnings surprise of 47.6%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Lamb Weston’s current fiscal-year EPS suggests an increase of 94.7% from the year-ago reported number.

General Mills, a branded consumer food company, currently carries a Zacks Rank #2 (Buy). GIS has a trailing four-quarter earnings surprise of 8.1%, on average.

The Zacks Consensus Estimate for General Mills’ current fiscal-year sales and earnings suggests growth of 6.3% and 7.4%, respectively, from the corresponding year-ago reported figures.

Conagra Brands, operating as a consumer packaged goods food company, currently carries a Zacks Rank #2. CAG has a trailing four-quarter earnings surprise of 13.2%, on average.

The Zacks Consensus Estimate for Conagra Brands’ current fiscal-year sales and earnings suggests an increase of 7% and 15.7%, respectively, from the year-ago reported number.


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