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Sysco Gains 18% in a Year: U.S. Foodservice the Sole Driver?

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Sysco Corporation (SYY - Free Report) has been scaling up the charts, with its shares rallying 17.7% over a year, versus the industry’s slump of 13.2%. We note that Sysco’s U.S. Foodservice Operations has been performing quite well of late, courtesy of its strategic growth efforts.


Notably, sales at this segment grew 6.6% and 3.9% year over year in the second and first quarters of fiscal 2018, respectively. During the second quarter, segment sales advanced 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%. Markedly, local case volumes in this segment has been rising year over year for 15 consecutive quarters.

Sysco’s U.S. Foodservice business has been gaining from the company’s solid brand strength across the nation, thanks to the impressive product assortment; constant focus on brand revitalization and innovations. In this regard, Sysco has been benefiting from its efforts to offer on-trend products as well as the success of its e-commerce platform. In fact, the result of these initiatives is evident from the fact that Sysco’s local customers contributed about 46% to the total cases bought, marking 37 bps growth from the year-ago period.

Although the Zacks Rank #3 (Hold) company has been incurring high operating and selling expenses that can weigh on margins, a chunk of these expenses is allocated toward investments for business growth. Incidentally, Sysco recently announced the takeover of Doerle Food Services (a Louisiana-based food service distributor), in a drive to widen its U.S. distribution network. This buyout is expected to strengthen Sysco’s core business and maximize customers’ value. Investments like these and effecting marketing, along with productivity gains are likely to continue fuel the U.S. Foodservice Operations segment.

What Else Keeps Sysco Well Placed for Growth?

Apart from strength in the U.S. Foodservice Operations unit, Sysco has been riding on its focus on its key growth strategies announced last year. Sysco’s four core strategies include enhancing consumers’ experience; optimizing business; stimulating power of its people and achieving operational efficacy. 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 merger and acquisitions, make share buybacks, repay debt and attain a preferred dividend payout ratio of 50-60% over time. Talking of acquisitions, the company has been carrying out various buyouts over the years to grow its distribution network and customer base and boost long-term growth. In fact, Sysco 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.

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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