Sysco (SYY) Benefits From Recipe for Growth: Cost Woes Stay

Sysco Corporation SYY looks well-placed on its solid Recipe for Growth plan, which involves five strategic priorities aimed at enabling the company to grow 1.5 times faster than the market by fiscal 2024 end. Apart from this, gains from acquisitions and a rebound in the away-from-home food space are also working well for the company.

However, Sysco is battling inflated labor and transport costs due to supply-chain disruptions. High transformation and snapback investments are also a concern. Let’s delve deeper into all aspects surrounding this Zacks Rank #3 (Hold) company.

Sysco Corporation Price, Consensus and EPS Surprise

Sysco Corporation price-consensus-eps-surprise-chart | Sysco Corporation Quote

Recipe for Growth – a Major Driver

Sysco is progressing well with its Recipe for Growth and earlier unveiled plans to generate the cost curtailment of $750 million for the period of FY21 to FY24. Recipe for Growth involves five strategic priorities, which include enhancing customers’ experiences via digital tools. In this regard, the company’s Sysco Shop platform and the new pricing software are working well. Further, SYY is focused on improving the supply chain to cater to customers efficiently and consistently with better delivery and omnichannel inventory management. Next, Sysco aims at providing customer-oriented merchandising and marketing solutions to augment sales. The company also targets having team-based selling, with an emphasis on important cuisines. Finally, Sysco is focused on cultivating new capacities, channels and segments alongside sponsoring investments via cost-saving initiatives.

Focus on Buyouts

Sysco has been carrying out various acquisitions over the years to grow its distribution network and customer base and boost long-term growth. In February 2022, Sysco acquired The Coastal Companies, a well-known fresh produce distributor and value-added processer. The acquired business will operate under Sysco’s specialty produce business – FreshPoint. The buyout will enhance FreshPoint’s service in the Mid-Atlantic region. The move will also strategically diversify SYY’s portfolio by adding retail and ready-to-eat capabilities along with state-of-the-art facilities. The company acquired Greco and Sons in the first quarter of fiscal 2022, which delivered a strong performance in the second quarter. The inclusion of Greco and Sons is likely to help Sysco better cater to Italian-focused customers. We note that this acquisition goes in tandem with Sysco’s Recipe for Growth.

Image Source: Zacks Investment Research

Hurdles on Way

Sysco’s second-quarter bottom line was affected by greater-than-anticipated operating costs stemming from the pandemic. Apart from double-digit inflation, the company also countered productivity hurdles and its snapback and transformation investments, which amounted to $73 million in the quarter. The company also spent $44 million as an operating expense investment associated with its Recipe for Growth plan. Additionally, Sysco encountered productivity expense challenges in the quarter. All of these led to a spike in adjusted operating expenses, which came in at $2.4 billion.

Sysco witnessed increased supply-chain hurdles in the second quarter due to the pandemic, which, in turn, is leading to elevated transport and labor costs. These challenges are likely to persist in the near term. Additionally, the company has been encountering product cost inflation in the U.S. Foodservice unit for a while now. In the second quarter of fiscal 2022, U.S. Broadline saw 14.6% product cost inflation, mainly due to the meat and poultry categories. The company’s overall gross margin contracted 44 basis points to 17.7%.

In the second quarter of fiscal 2022, sales were somewhat affected by the impact of Omicron. Though sales increased year over year, growth decelerated in December due to hurdles stemming from the Omicron variant. The variant weighed on Sysco’s customers’ top line and operating hours.
Omicron-related curbs impacted sales and volume performances of the company, especially in the United Kingdom, France and Canada. These curbs affected the performance of the company’s customers and their ordering trends.

Consequently, management expects Omicron to continue affecting sales in the third quarter. The company revised its back-half guidance due to hurdles caused by Omicron and a tough labor scenario. For fiscal 2022, management expects adjusted earnings per share (EPS) in the range of nearly $3-$3.10 now compared with the $3.33-$3.53 range expected before. Adjusted EPS in the back half is envisioned in the range of roughly $1.60-$1.70.

However, we expect the abovementioned upsides to keep Sysco well-positioned for long-term growth. Shares of this marketer and distributor of various food and related products, primarily to the foodservice or food-away-from-home industry, have climbed 1.3% in the past six months compared with the industry’s growth of 5%.

A Renowned Consumer Staple Stock

A popular pick from the broader Zacks Consumer Staples sector is Altria Group, Inc. MO, which has also been benefiting from its strong pricing power and a focus on oral tobacco products, such as on!. For 2022, Altria envisions 4% to 7% growth in the bottom line, which is likely to be more weighted toward the second half.  This tobacco giant currently carries a Zacks Rank #3. Shares of MO have increased 20% in the past six months. The Zacks Consensus Estimate for the company’s current financial-year EPS suggests growth of around 5% from the year-ago reported figure.

Looking for Consumer Staple Stocks? Check These

Some better-ranked stocks are Tyson Foods TSN and Flowers Foods FLO.

Tyson Foods, a renowned meat products company, carries a Zacks Rank #2 (Buy) at present. Shares of Tyson Foods have jumped 16.7% in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Tyson Foods’ current financial-year sales and EPS suggests growth of 9.5% and 5.6%, respectively, from the year-ago reported number. TSN has a trailing four-quarter earnings surprise of 32.2%, on average.

Flowers Foods, the producer and marketer of packaged bakery products, currently carries a Zacks Rank #2. Shares of Flowers Foods have risen 6.4% in the past six months.

The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and EPS suggests growth of 7.2% and roughly 4%, respectively, from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of around 9%, on average.

7 Best Stocks for the Next 30 Days

Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."

Since 1988, the full list has beaten the market more than 2X over with an average gain of +25.4% per year. So be sure to give these hand-picked 7 your immediate attention. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.