Industrywide Challenges Drag on Sysco's Results, but Recipe for Growth Initiative Remains Intact

Narrow-moat Sysco reported soft fiscal second-quarter results, with weak case volumes industrywide and idiosyncratic impacts from a labor dispute weighing on profitability. The firm's Recipe for Growth plan remains intact, managing operating expenses by optimizing last-mile delivery routes while investing in worker retention and increasing saturation in local markets. Though the firm was able to outgrow the market by 1.35 times (a modest slowdown from the firm's 1.40 times a quarter ago), case volumes clocked in about 400 basis points below projections at just 1% annualized growth, weighing on results. We don't expect those pressures to abate in the near term, with transaction volumes flagging at many restaurant chains despite strong nominal sales growth as consumers shift meal occasions toward the cheaper at-home channel. As we digest quarterly results, we expect to modestly trim our $83 fair value estimate, with a $330 million one-time cash charge for transferring pension fund obligations to an insurer and a lower profit guidance (to a midpoint $4.07 in diluted EPS, from $4.24) providing the impetus. We expect our revised forecasts to clock in at the lower end of the guided range.