Sysco Up More Than 35% YTD: Will Momentum Continue in 2020?

Sysco Corporation SYY is well positioned for 2020, given its key growth strategies, yielding buyouts and cost-containment efforts. Further, the company’s U.S. Foodservice segment has been a major driver and is likely to remain one. These upsides have helped this Zacks Rank #3 (Hold) stock showcase a solid run this year despite cost-related headwinds and hurdles in the International segment.

Incidentally, Sysco’s shares have surged 37.5% year to date, outperforming the industry’s growth of 18.9%. Let’s take a closer look at the factors aiding the company, which has a long-term earnings per share growth rate of 9.4%.

Factors Working in Sysco’s Favor

Sysco is on track with its four core strategies, which include enhancing consumers’ experience, optimizing business, stimulating the power of its people and achieving operational efficacy. In this regard, the company focuses on enhancing assortments, making constant innovation, ensuring food safety and revitalizing brands. Notably, Sysco’s decision to sell its Iowa Premium cattle processing business will help it focus on core areas with greater growth potential. Further, the company is undertaking efforts to improve the supply chain, increase transparency, enhance deliveries and manage product costs effectively.

Apart from this, Sysco is committed to investing in technology and enhancing e-commerce operations. The company witnessed a continued increase in the use of its digital ordering platform. Also, it focuses on enhancing its customer-facing tools like a fresh delivery app and other enrichments on its digital shopping platform. Additionally, Sysco is benefiting from acquisitions, which have been strengthening its distribution network and customer base. The company recently acquired J. Kings Food Service Professionals (on Aug 12) and the sister firms — J & M Wholesale Meats and Imperio Foods (in April).

Markedly, the company’s U.S. Foodservice unit has been performing well for quite some time now. The robust trend continued in first-quarter fiscal 2020, wherein sales in this division advanced 2.5% to $10,658.6 million. Local case volumes within U.S. Broadline operations inched up 1.5% (including organic sales growth of 1.4%) and marked its 22nd consecutive quarter of growth. Clearly, a favorable economic scenario marked by a strong labor market is likely to continue working in favor of restaurant sales, thereby boosting the U.S. Foodservice segment.

Hurdles Likely to be Countered

The International unit’s performance has been mixed for a while. In the first quarter of fiscal 2020, segment revenues slipped 0.3% to roughly $2,912.4 million, with adverse foreign currency impacts of 3.3%. While sales improved in Canada and Latin America, performance in France continued being hurt by operational and supply-chain integration endeavors related to Brake France and Davigel. These challenges are likely to persist throughout the fiscal. Also, performance in the U.K. was stable but uncertainties related to Brexit were a headwind.

Additionally, Sysco has been encountering cost-related headwinds for a while. During the first quarter of fiscal 2020, the U.S. Foodservice unit was hurt by food-cost inflation of nearly 2.9% in U.S. Broadline, particularly in categories like meat, poultry, dairy and produce. Also, adjusted operating expenses rose 0.4% on higher labor and operational costs.

Although a persistent rise in such expenses poses a threat to margins, we commend Sysco’s cost-saving initiatives. In connection with this, the company’s Finance Transformation Roadmap and Smart Spending initiatives bode well. Further, Sysco is committed to lowering its overall administrative costs. Considering these factors, we believe that Sysco will sustain its impressive momentum.

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