Sysco Corporation’s (SYY - Free Report) stock has been moving up the charts, thanks to its focus on strategic growth initiatives which have also helped the company to put up an impressive past record. Well, this food products company has gained 17.7% in a year, as against the industry’s decline of 8.6%. So, let’s take a closer view of the factors that have spurred investors’ confidence in this Zacks Rank #2 (Buy) stock, which is most likely to keep its spectacular show on.
Focus on 2020 Strategy
Sysco remains focused on its key growth strategies which were outlined at its New York Investor Day event, wherein it also highlighted its three-year financial goals. Sysco’s four core strategies are 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 well 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. Driven by these strategies, Sysco expects gross profit to rise in a band of 55% to 65%, while it anticipates reducing administrative expenses by 20-25% by 2020. Earnings per share is envisioned to grow at a double-digit rate on an average, by 2020. Also, the company’s solid balance sheet and free cash flow augmenting ability will help it make business investments, continue with mergers and acquisitions, make share buybacks, repay debt and attain a preferred dividend payout ratio of 50-60% over time.
Robust Acquisitions Bolster Growth
The company has been carrying out various acquisitions over the years to grow its distribution network and customer base and boost long-term growth. The company expects to achieve 0.5–1% sales growth through acquisitions in the long term. Other than sales growth, these acquisitions also enhance its presence in international markets and its product portfolio. In this regard, Sysco recently acquired Doerle Food Services to widen its US distribution network. Prior to that it also inked a deal to buy Kent Foods, which is expected to bolster its U.K. and European business bandwagon. In an earlier development, the company acquired Hawaii-based HFM FoodService to add it to its U.S. Foodservice segment. Apart from this, Sysco’s acquisition of London-based Brakes Group in July 2016 has been benefiting the company significantly. Notably, the combined companies are expected to generate sales of approximately $55 billion annually.
U.S. Foodservice Segment: A Major Driver
Sysco’s U.S. Foodservice business has been doing exceptionally well, which also drove the company’s second-quarter fiscal 2018 results, wherein both the top and bottom line grew year over year and surpassed the Zacks Consensus Estimate. While this marked Sysco’s fourth straight quarter of sales beat, earnings have outpaced the Zacks Consensus Estimate in eight of the past nine straight quarters. During the second quarter sales from U.S. Foodservice Operations advanced 6.6% to $9,681.2 million as restaurant sales continued to grow — which 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.
Cost-Saving Efforts & Favorable View
Sysco has been impressively managing expenses since the past few years. The company is making progress in both SG&A and supply chain. In the supply chain area, the company is witnessing positive momentum from its productivity initiatives and ongoing process improvements, which are driving efficiencies specifically in the warehouse. The company achieved $417-million operating income growth since fiscal 2015 and remains on track to achieve the high end of the three-year adjusted operating income growth target of approximately $600 million to $650 million through the end of fiscal 2018. Sysco envisions this operating income growth to come from reducing administrative costs and improving gross margin.
All said, management expects a stronger second half, wherein it also anticipates favorable results from its International segment. Moreover, the company envisions annual savings of roughly $200-$300 million from the recent tax reforms, which is likely to fuel 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 another solid year.
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