Sysco (SYY) Tops Q4 Earnings On Improved Margins

Global food products maker and distributor Sysco Corporation (NYSE:SYY) posted mixed fourth quarter and fiscal 2016 results, wherein earnings beat the Zacks Consensus Estimate and revenues marginally missed the same in both the periods. Focus on acquisition and margin improvement probably resulted in the beat.

Adjusted earnings (excluding restructuring and merger-related costs) of 64 cents per share beat the Zacks Consensus Estimate of 60 cents by 6.7% and were up 23.1% year over year. Growth in sales, expense management and improved gross and operating margin led to the growth. On a constant currency basis, earnings increased 15.4% to 60 cents.

Quarter in Detail

Sysco's sales of $13.65 billion marginally missed the Zacks Consensus Estimate of $13.71 billion by 0.4%, and increased 10.0% on a year-over-year basis in the fourth quarter of fiscal 2016, as strong volume growth was offset by unfavorable currency impact of 0.5%. Case volume for the company's U.S. Broadline operations grew 10.2%, while local case growth within U.S. Broadline operations grew 10.3%. Acquisitions contributed 1.2% to sales growth.

Excluding currency, sales increased 2.2% in the fourth quarter.

Gross profit improved 12.7% to $2.5 billion in the quarter, while gross margin improved 44 basis points (bps) to 18.3% due to the company’s ongoing growth strategy, which focuses on accelerating sales, reducing costs and mitigating ongoing gross margin pressure. Excluding currency, gross profit increased 4.7%.

Adjusted operating income also increased 23.4% in the quarter to $628 million despite a 9.6% increase in adjusted operating expenses. Adjusted operating margin improved 50 bps to 4.6%.

Food cost deflation was 1.2%as the company witnessed deflation in the meat and dairy categories, partially offset by modest inflation in other categories.

SYSCO CORP Price and Consensus

SYSCO CORP Price and Consensus | SYSCO CORP Quote

Fiscal 2016 Results

In fiscal 2016, adjusted earnings increased 14.1% to $2.10 per share. Earnings also beat the Zacks Consensus Estimate of $2.03 per share by 3.4%. On a constant currency basis, earnings increased 12%.

Sysco's sales of $50.367 billion marginally missed the Zacks Consensus Estimate of $50.391 billion, but increased 3.5% on a year-over-year basis in fiscal 2016, despite unfavorable currency impact of 1.3%. Excluding currency, sales increased 1.5% in the fiscal year 2016.

Other Financial Updates

Cash and cash equivalents were $3.9 billion at the end of Jul 2, 2016, compared with $610.8 million at the end of Mar 26, 2016. Long-term debt at the end of the fourth quarter was $7.34 billion, compared with $4.27 billion at the end of third quarter.

Our Take

We are impressed by the fact that Sysco has delivered higher gross margins for the last five consecutive quarters, after witnessing declining gross margins since the last two fiscal years due to multiple factors. It seems that the company’s growth strategy is paying off and its efforts to boost sales and margins are bearing fruits.

The company’s sales have also improved consistently driven by acquisitions and volume growth. However, the company expects earnings to remain under pressure due to currency headwinds and food cost deflation.

Sysco has a Zacks Rank #2 (Buy).

Other well positioned food companies in the industry include Ingredion, Inc. (NYSE:INGR) , Omega Foods Corp. (NYSE:OME) and Pinnacle Foods, Inc. (NYSE:PF) . While Ingredion and Omega Foods hold a Zacks Rank #1 (Strong Buy), Pinnacle Foods carries the same Zacks Rank as Sysco.