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Can Sysco (SYY) Retain Solid Past Record Amid Cost Hurdles?

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Sysco Corporation (SYY - Free Report) has been in investors’ good books for quite some time now, courtesy of its splendid past record. The company has been gaining from a host of factors, especially its key growth strategies and strong U.S. Foodservice unit. This is well-reflected in its performance, as Sysco rallied as much as 41.3% in a year, against the industry’s decline of 2.5%.

However, the company has been bearing the brunt of rising freight costs and input cost inflation, which may put pressure on margins. Let’s analyze both sides of the story and see if the Zacks Rank #3 (Hold) company can keep its robust show on.

Four Core Strategies for 2020

Sysco is on track with its key growth strategies for 2020, which include 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. Moreover, it plans to improve supply chain, increase transparency, enhance deliveries and manage product costs effectively.

Driven by these strategies, the company witnessed local case growth and improved gross profit during the third quarter of fiscal 2018. Further, management believes that the company is well positioned to achieve adjusted operating income improvement in the higher end of its targeted range $600-$650 million. Also, the company’s solid balance sheet and ability to augment free cash flow will help it make business investments, continue with mergers and acquisitions, make share buybacks, provide adequate dividends and repay debts.

Strong U.S. Foodservice Unit, Buyouts to Drive Sales

Sysco’s sales have long been gaining from strength in the company’s U.S. Foodservice operations. Sales at this segment advanced 5.1% to $9,704.5 million in third-quarter fiscal 2018 on the back of 2.6% growth in local case volume within U.S. Broadline operations, while total case volumes jumped 2.4%. Notably, local case volumes in this segment have been rising year over year for 16 consecutive quarters. Additionally, rising restaurant sales has been benefitting the company’s U.S. operations for a while.

Also, Sysco has been carrying out various acquisitions over the years to grow its distribution network and customer base, and boost long-term growth. In this regard, Sysco closed its Kent Foods buyout deal during the third quarter and expects the same to bolster the U.K. and European business bandwagon. During the third quarter, the company also concluded the acquisitions of Hawaii-based HFM FoodService and Louisiana-based Doerle Food Service. Incidentally, the HFM buyout aided the company’s U.S. Broadline operations during the third quarter.

Can It Sustain Past Record Sustain Amid Hurdles?

Owing to the aforementioned upsides, favorable international segment results and lower taxes, Sysco retained its splendid record in its third-quarter fiscal 2018 results. Both top and bottom lines grew year over year and the latter surpassed the Zacks Consensus Estimate. This marked Sysco’s fourth straight quarter of earnings beat. In fact, the company’s bottom line has surpassed estimates in nine out of the past 10 quarters.

However, Sysco has been witnessing year-over-year contraction in gross margin for the past three quarters. In third-quarter fiscal 2018, gross margin contracted 9 basis points to 18.65%. The company continues to be negatively impacted by higher inbound freight costs, which stemmed from driver availability challenges in the industry. Segment-wise, during the third quarter, U.S. Broadline unit gross margin was marred by food cost inflation in categories like meat, dairy and produce.

Additionally, the International segment was hurt by inflation that resulted from a combination of product costs and currency translations in the United Kingdom. Also, the company has been grappling with headwinds in the European region for a while now. During the third quarter, Sysco’s European sales were hit by winter storms, while high product inflation and reduced shipping days also posed concerns for the region.

Despite these challenges, Sysco expects its upsides to continue in the forthcoming periods, thanks to its strong growth drivers. Analysts also seem to be confident about Sysco’s ongoing prospects, as earnings etimates for the fourth quarter and fiscal 2018 have gone up from 91 cents to 94 cents and from $2.97 to $2.99 respectively, over the past 60 days.

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Lamb Weston Holdings (LW - Free Report) , with long-term earnings per share growth rate of 12.2%, flaunts a Zacks Rank #2 (Buy).

B&G Foods (BGS - Free Report) , with a Zacks Rank #2, delivered positive earnings surprise in the last reported quarter and has gained 31.5% in the past three months.

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