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Buyouts & U.S. Foodservice to Fuel Sysco (SYY) Q4 Earnings

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Sysco Corporation (SYY - Free Report) is scheduled to release fourth-quarter fiscal 2018 results on Aug 13. This food and related products company has an impressive earnings surprise history, as it has outdone the Zacks Consensus Estimate for four straight quarters now, with an average beat of 2.3%.

Sysco Corporation Price and EPS Surprise
 

Sysco Corporation Price and EPS Surprise | Sysco Corporation Quote

Let’s delve deep and see if the company can retain this record this time around too.

Factors Driving the Quarter

Sysco remains on track with its four core strategies, 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.

Notably, these efforts have been yielding positively for Sysco and the company is expected to continue gaining from these core growth plans. Apart from this, focus on acquisitions also remains a major driving factor for Sysco that has carried out various buyouts to grow its distribution network, 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 pertaining to 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 and is likely to remain a tailwind.

Talking of the U.S. Broadline operations, local case volumes in this business have been rising year over year for 16 consecutive quarters, thereby driving the company’s U.S. Foodservice Operations. During the last reported quarter, the company’s U.S. Foodservice Operations witnessed sales growth of 5.1% owing to 2.6% increase in local case volumes within U.S. Broadline operations, while total case volumes jumped 2.4%. Additionally, rising restaurant sales have been benefitting the company’s U.S. operations for a while.  These factors along with lower taxes and favorable international segment results fueled Sysco’s third-quarter fiscal 2018 results, wherein both the top and bottom lines grew year over year.

Will Input Cost Inflation be Offset?

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 bear the brunt of 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 U.K.

Well, input cost inflation has been posing hurdles to many food companies, like Pinnacle Foods (PF - Free Report) , Conagra Brands (CAG - Free Report) and General Mills (GIS - Free Report) among others. Though input cost inflation remains a threat to Sysco’s performance, we expect the aforementioned growth drivers, especially strength in Sysco’s U.S. Foodservice operations, to help offset these hurdles.

What to Expect?

For the fourth quarter, the Zacks Consensus Estimate for sales at U.S. Foodservice and International units are pegged at $10,301 million and $3,025 million, reflecting year-over-year growth of 5.1% and 10.8%, respectively. The Zacks Consensus Estimate for overall sales is pegged at $15,450 million, which indicates year-over-year growth of 7.1%.

The Zacks Consensus Estimate for Sysco’s earnings have remained stable over the past 30 days at 94 cents, which reflects a 30.6% increase from the year-ago period figure.  

What Does the Zacks Model Unveil?

However, our proven model doesn’t show thatSysco is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Sysco carries a Zacks Rank #3 (Hold), it has an Earnings ESP of -0.21%, which makes surprise prediction difficult.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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