Company Reports

Foodservice distribution is highly fragmented, with Sysco holding just 17% as the leader of the roughly $350 billion U.S. market. However, we think its dominance is far stronger than share alone may imply. Restaurants demand timely and consistent delivery to serve the freshest food. Sysco adds value by allowing restaurants to buy the bulk of its needs from a single source rather than dozens of producers, simplifying logistics and saving time. While the goods it sells are commodities, Sysco can differentiate on selection, quality, and freshness while also offering services like menu planning and kitchen setup advice. Indeed, we believe this has driven top-line growth that has outpaced industry growth, which should persist, leading to our 4.5% average annual sales growth forecast.

Wide-moat Sysco delivered a strong (December-ended) fiscal 2024 second quarter that puts it well within sight of its full-year guidance and our forecast. Sales grew nearly 4% year over year, with an adjusted operating margin of 4%, up about 30 basis points over the prior year. The company reaffirmed its fiscal 2024 guidance of mid-single-digit sales growth (to approximately $80 billion) and adjusted EPS growth of 5%-10% (to $4.20-$4.40). This outlook compares with our fiscal 2024 forecast of $79.7 billion in sales and adjusted EPS of $4.38. We don’t expect to change our forecasts materially or our fair value estimate of $78 per share. But, at present, shares look roughly fairly valued to us after a 7% post-report jump on Jan. 30.

We’ve upgraded Sysco’s moat rating to wide and Capital Allocation Rating to Exemplary. We’ve raised our fair value estimate for Sysco to $78 per share from $73 mostly due to the upgraded moat rating. Still, we see limited risk-adjusted upside at current prices.

Foodservice distribution is highly fragmented, with Sysco holding just 17% as the leader of the roughly $350 billion U.S. market. However, we think its dominance is far stronger than share alone may imply. Restaurants demand timely and consistent delivery to serve the freshest food. Sysco adds value by allowing restaurants to buy the bulk of its needs from a single source rather than dozens of producers, simplifying logistics and saving time. While the goods it sells are commodities, Sysco can differentiate on selection, quality, and freshness while also offering services like menu planning and kitchen setup advice. Indeed, we believe this has driven top-line growth that has outpaced industry growth, which should persist, leading to our 5% average annual sales growth forecast.

We believe Sysco possesses a narrow moat, rooted in its cost advantage. We surmise the firm benefits from lower distribution cost given its closer proximity to customers, augmented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding pre-pandemic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (10% of pre-pandemic national account sales) and a 10% increase in independent restaurant customers.

Narrow-moat Sysco reported solid quarterly earnings, posting 2.6% growth in net sales and 10.6% growth in adjusted operating profit despite stout industry headwinds. We continue to expect a challenging few quarters in the restaurant industry, with consumers tightening the belt on discretionary expenditures amid still-high inflation and rising borrowing costs, but are impressed with the food distributor's ability to manage costs and gain share in a difficult environment. On balance, we expect to lower our $76 fair value estimate by a low-single-digit percentage, largely attributable to costs tied to the firm's acquisitions of Edward Don (restaurant equipment) and BIX produce. Shares continue to look attractive, even after a modest uptick in intraday trading.

We believe Sysco possesses a narrow moat, rooted in its cost advantage. We surmise the firm benefits from lower distribution cost given its closer proximity to customers, augmented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding pre-pandemic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (10% of pre-pandemic national account sales) and a 10% increase in independent restaurant customers.

Narrow-moat Sysco reported fiscal full-year results in line with our expectations, with $76.3 billion in sales and $3.47 in GAAP EPS ($4.01 non-GAAP) aligning closely with our $76.7 billion and $3.51 ($3.98) estimates, respectively. Despite deflationary food costs in many categories within the U.S. broadline business, the foodservice distributor grew its gross profit margin and gross profit per case on an annual basis, with improvements to its pricing tool permitting the operator to navigate an unprecedented period of input cost volatility. After digesting results, we expect to lower our $78 fair value estimate by a low-single-digit percentage, with a slower-than-anticipated margin recovery over the next couple of years offset by time value.

We believe Sysco possesses a narrow moat, rooted in its cost advantages. We surmise the firm benefits from lower distribution cost given its closer proximity to customers, augmented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding pre-pandemic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (10% of pre-pandemic national account sales) and a 10% increase in independent restaurant customers.

Narrow-moat Sysco reported mixed fiscal third-quarter results, with $0.90 in diluted earnings per share missing the FactSet consensus estimate of $0.92 despite a modest top-line beat as $18.9 billion in sales edged the $18.6 billion consensus forecast. While the firm continues to execute on its Recipe for Growth strategic roadmap—seeing 35 and 75 basis points of gross and operating margin expansion, respectively—a softer macroenvironment led management to tighten its full-year guidance around the lower bound of its prior adjusted EPS range of $4.00-$4.15. The shares fell 3%-4% after the release, and we expect to trim our $82 fair value estimate by a similar percentage as we contemplate sluggish sales momentum and margin recapture in the year to come as both organic case growth and inflation are set to fall. The shares look modestly undervalued.

Narrow-moat Sysco's search for a CFO has concluded, with Kenny Cheung set to step into the role on April 17. Interim CFO Neil Russell, a longtime Sysco insider, will move into a newly created chief administrative officer role predominantly designed to oversee the execution of the firm's "Recipe for Growth" strategy. We don't expect to change our $82 fair value estimate or our Standard Capital Allocation Rating in light of the transition.

We believe Sysco possesses a narrow moat, rooted in its cost advantages. We surmise the firm benefits from lower distribution cost given its closer proximity to customers, augmented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding pre-pandemic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (10% of pre-pandemic national account sales) and a 10% increase in independent restaurant customers.

We believe Sysco possesses a narrow moat, rooted in its cost advantages. We surmise the firm benefits from lower distribution cost given its closer proximity to customers, augmented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding pre-pandemic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (10% of pre-pandemic national account sales) and a 10% increase in independent restaurant customers.

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.

We believe Sysco possesses a narrow moat, rooted in its cost advantages. We surmise the firm benefits from lower distribution cost given its closer proximity to customers, augmented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding pre-pandemic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (10% of pre-pandemic national account sales) and a 10% increase in independent restaurant customers.

Sysco’s fiscal first-quarter results reinforce our view that the company is effectively managing the variables under its control. Given the success of its Recipe for Growth strategy, Sysco’s U.S. segment (71% of sales) grew 1.4 times the pace of the industry per Technomic, topping our 1.35 times full-year estimate. Sysco gained share with local restaurants and national accounts alike, closing multiyear contracts in the education, healthcare, and restaurant sectors, with profitability above historical norms. While servicing national accounts is a low-margin business, it plays an important role in helping Sysco achieve the scale that underpins its cost advantage, the foundation of its narrow moat.

We believe Sysco possesses a narrow moat, rooted in its cost advantages. We surmise the firm benefits from lower distribution cost given its closer proximity to customers, complemented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding prepandemic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (10% of prepandemic national account sales) and a 10% increase in independent restaurant customers.

Narrow-moat Sysco reported 27% sales growth in its fiscal fourth quarter (excluding the extra week), topping our 19% estimate thanks to steeper food inflation (15% in the U.S. versus our call for 9%). While Sysco is not yet seeing softer demand, we plan to lower our U.S. food-service industry case volume forecast to flat for Sysco’s fiscal 2023, from 3% growth previously, as consumers are more likely to eat at home to help curb inflation. But Sysco should be partially insulated from this blow; its market share gains have accelerated per Technomic, with Sysco growing 1.3 times the pace of the industry during fiscal 2022, topping our 1.2 times estimate. Sysco is reaping the rewards of its Recipe for Growth strategy, including supply chain investments, that have resulted in industry-leading on-time/in-full orders per management, causing customers to shift more business its way. Despite our more conservative stance on the industry, we plan a mid-single-digit increase in our $81 fair value estimate, driven by accelerating market share gains and food prices that we now expect to hold stable rather than deflate. But with the shares trading near our valuation, we suggest investors remain on the sidelines.

We believe Sysco possesses a narrow moat, rooted in its cost advantages. We surmise the firm benefits from lower distribution cost given its closer proximity to customers, complemented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding prepandemic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (3% of prepandemic sales) and a 10% increase in independent restaurant customers.

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.