Sysco U.S. Foodservice Unit Solid, International Woes Linger

Sysco Corporation SYY has been performing well despite headwinds in its International Foodservice segment. This Zacks Rank #3 (Hold) stock has rallied 31.1% so far this year, outpacing the industry’s growth of 16.6%. Notably, Sysco has been gaining from continued strength in its U.S. Foodservice segment. Also, the company’s core growth strategies are noteworthy. Let’s delve deeper.

Sysco Looks Well Positioned

Sysco’s U.S. Foodservice unit has been performing well for quite some time now. During first-quarter fiscal 2020, sales in this division advanced 2.5% to $10,658.6 million. Local case volumes within U.S. Broadline operations inched up 1.5% and total case volumes rose 0.5%. Notably, local case volumes in this segment have been rising year over year for 22 consecutive quarters now. Clearly, a favorable economic scenario marked by a strong labor market is likely to continue benefiting restaurant sales, thereby boosting the U.S. Foodservice segment.

Also, Sysco is focused on making buyouts to strengthen this unit. This is evident from the company’s latest buyouts of Hawaii-based sister companies — Armstrong Produce and Kula Produce. The acquisitions will form part of Sysco’s specialty produce company — FreshPoint — within the broader U.S. Foodservice Operations.

Apart from this, we commend Sysco’s four core strategies — 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. Further, to evolve with the changing consumer preferences, the company is committed to investing in technology and enhancing e-commerce operations.

Sysco, which shares space with Conagra Brands CAG, also plans to improve supply chain, increase transparency, enhance deliveries and manage product costs effectively. In fact, the company is on track with its cost-saving initiatives, which is reflected in its results. In connection with this, Sysco is focusing on its Smart Spending initiative, which involves a detailed analysis of indirect spending categories. This is aimed at spotting such areas and making cost curtailments accordingly. Additionally, Sysco is committed to lowering its overall administrative costs.

Can International Woes be Offset?

Sysco’s International unit’s performance was mixed 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%. Also, gross margin contracted 20 bps to 20.87%. Currency headwinds weighed on segment gross profit by 3.7%.

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. Further, performance in the U.K. was stable but uncertainties related to Brexit were a concern.

Nevertheless, we expect Sysco’s growth initiatives and factors supporting the U.S. Foodservice unit to help it offset these hurdles and maintain its impressive momentum.

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