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Sysco (SYY) Up 9% in 3 Months, Gains on U.S. Foodservice Unit

Zacks Equity Research

With well-chalked efforts to boost brand portfolio and financial efficacy, Sysco Corporation SYY is an appropriate investment pick. This Zacks Rank #3 (Hold) company’s shares have gained 9.3% in the past three months compared with the industry’s rise of 1.7%. Focus on strategy for 2020 and strength in the U.S. Foodservice segment are some of the factors driving its performance. However, cost inflation and mixed performance in the International unit are concerns. Let’s take a closer look.

Strong U.S. Foodservice Unit

Sysco’s U.S. Foodservice unit has been performing well for quite some time. The robust trend continued in fourth-quarter fiscal 2019, wherein sales in the division rose 2.8% to $10,696 million. Local case volumes within U.S. Broadline operations inched up 1.4% (including organic sales growth of 1.3%). Notably, local case volumes in the segment have been rising year over year for 21 consecutive quarters. Clearly, a favorable economic scenario marked by a strong labor market is likely to continue driving restaurant sales and boost the U.S. Foodservice segment.

Other Growth Catalysts

As part of its growth strategies for fiscal 2020, Sysco is on track with enhancing assortments, making constant innovations, ensuring food safety and revitalizing brands. We note that the company recently launched nine new products under the Cutting Edge Solutions platform.

Sysco’s focus on acquisitions is also helping it expand distribution network and customer base. To this end, the company announced the buyout of J. Kings Food Service Professionals in August, 2019. In April, the company took over sister firms — J & M Wholesale Meats and Imperio Foods. Earlier, it had also announced a deal to acquire Waugh Foods.

Also, the company is progressing well with cost-saving initiatives. Markedly, the Finance Transformation Roadmap concentrates on modernizing the company’s international financial platform. Also, Sysco is focusing on its Smart Spending initiatives that include a detailed analysis of indirect spending categories. Finally, Sysco is committed toward lowering its overall administrative costs. Apart from this, the company focuses on boosting overall organizational transparency, supply chain effectiveness and production costs. Further, to evolve with the changing consumer preferences, it is committed to invest in technology and enhance e-commerce operations.

Can Efforts Pare Challenges?

The International unit’s performance was mixed throughout fiscal 2019. Segment sales slipped 0.8% to roughly $2,924 million in the fourth quarter of fiscal 2019. While sales remained strong in Canada, performance in France was hurt by integration endeavors related to Brake France and Davigel. Persistence of such trends is a hindrance to the division.

Moreover, the company has been encountering cost-related headwinds for a while. During the fourth quarter of fiscal 2019, the U.S. Foodservice unit was somewhat hurt by food-cost inflation of nearly 2.5% in U.S. Broadline, particularly in categories like meat, poultry and produce. Also, adjusted operating expenses escalated 4.9% due to higher supply chain as well as labor costs across warehouse and transportation. Other food companies such as Lamb Weston LW, Conagra Brands CAG and Kellogg K are also under pressure due to rising costs.

Nonetheless, we believe that the company’s cost-saving initiatives and other robust strategies to boost revenues will help it overcome the aforementioned hurdles as well as aid the company to maintain its impressive show.

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

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