Sysco (SYY) Posts Mixed Earnings on Rising Food Cost Inflation

Food service supplier Sysco (SYY: Charts, News) missed earnings estimates yesterday, which it attributed to higher food and overhead costs. The Houston, Texas-based company, which has a market cap of $17.3 billion, is the largest in its industry, and sells food products in bulk to healthcare, educational and hospitality facilities.

Sysco is notably the largest non-oil company is Houston and the third largest in Texas. The company operates in six segments - Broadline, SYGMA, Specialty Companies, Guest Services and its International Group. The company's most important revenue stream comes from its Broadline segment, which includes 89 broadline operating companies that distribute food and non-food products to restaurants and other facilities. Sysco operates 177 distribution plants across the United States, and serves over 400,000 customers.

Daily Chart
Shares slipped over 4% during Monday trading, denting the stock that had risen 5.4% over the past year. For the company's fiscal second quarter, it reported earnings of 43 cents per share, or $250.1 million, on revenue of $10.2 billion. This was a 3.1% drop in profit and a 9.2% gain in revenue from the prior year quarter, which missed the average earnings consensus of 44 cents per share, but beat the revenue estimate of $10.1 billion. The company's Broadline segment accounted for $8.3 billion of those revenues, a 10% improvement from the prior year quarter. Meanwhile, its SYGMA segment, which is focused on full line distribution channels, posted a 7% gain to $1.4 billion. Together, the two segments posted a 3.6% gain in case volumes. Sysco's acquisition of Goldberg & Solovy Foods, which was acquired for an undisclosed sum in May 2011, contributed to a 0.7% boost in revenues for the quarter.

Excluding such one-time charges as costs from business renovation and corporate life insurance, earnings actually grew slightly to 46 cents per share, which beat the analyst consensus. Sysco had spent $33 million during the quarter on replacing its delivery vehicles and facilities, as well as upgrading its technology and operating plants.

However, shares still sold off with little regard to the adjusted or non-adjusted earnings. Investors were concerned about the company's gross margins, which decreased from 18.8% to 18%, a red flag when coupled with the 10% increase in input costs. These shrinking margins and rising costs were mainly caused by highly competitive industry peers, which forced Sysco to offer aggressive, margin-sacrificing promotions in order to maintain sales volume. In addition, food-cost inflation rose year-on-year from 4.5% to 6.3%, but was still an improvement from the 7.3% last quarter. Prices for meat, canned, dried and frozen products were the most affected by inflation during the quarter.

CEO Bill DeLaney remained optimistic about the company's results. "Our case growth trends improved in the latter part of the quarter as we were well positioned to benefit from the favorable market conditions our customers experienced during the holiday season," he stated. However, he expressed caution regarding the danger of rising costs and inflation, stating, "Adjusted operating earnings growth in our core business was modest however, as product cost inflation continued at historically high levels and pricing pressure remained acute."

Although some investors are attracted to Sysco's 3.5% dividend yield, the stock has limited upside, bouncing between support near $28 and heavy resistance between $32 and $34. Although its forward P/E of 13.8 is healthy, its 5-year PEG ratio of 2.2 suggests little growth potential on the horizon. The company's future is directly tied to consumer discretionary spending in the United States. If the U.S. economy fails to firm up, despite encouraging signs of improvement, then restaurant businesses may be adversely impacted.

Other News About SYY
Inflation, Operating Costs Eat Up Sysco's Profits
Inside Sysco's less than impressive numbers.
Sysco's Dividend X-Ray
Are Sysco's dividends sustainable? Other Stocks in the News
Activision Blizzard Inc. Fourth Quarter Earnings Sneak Peek
Is Activision poised to pop?
DuPont to Boost Food Production
DuPont gets ready to feed a rapidly increasing global population.

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Published on Feb 7, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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