Sysco’s Cost Advantage Is Resulting in Market Share Gains, but Shares Appear Fully Valued

In its March-ended fiscal third quarter, Sysco’s sales grew 43%, driven by a strong recovery in case volumes (which now exceed the pre-COVID-19 level in the U.S.) and double-digit inflation. This topped our estimate for 33% sales growth, as inflation was higher than expected (16% in the U.S. versus our 7% mark) while volumes were in line. A spike in COVID-19 cases caused some softness in food-service sales in January, but business has been strong since February, with no sign of consumers reverting to at-home dining in the face of accelerating inflation. For U.S. broadlines (71% of sales) the company is on track to meet its goal (and our expectation) to grow at 1.2 times the rate of the market this fiscal year, and 1.5 times by fiscal 2024, having surpassed the 1.2 times pace during the quarter. We think Sysco’s scale-based cost advantage (which underpins its narrow moat) is driving share gains, along with its increased flexibility (no order minimums) and above-average service levels, which are leading to new customer wins. Further, new sales tools are increasing Sysco’s share of wallet at existing accounts, such as using data analytics to suggest additional products that are appealing to customers.