Company Reports

Despite operating in the highly fragmented and fiercely competitive foodservice distribution vertical, we believe US Foods remains a staunch competitor. The firm has honed its cost structure by reducing complexity, modernizing its infrastructure, and flexing its negotiating clout with suppliers, all while beefing up investment in value-added services, its salesforce, and proprietary products to win over lucrative independent restaurants and customers in the healthcare and hospitality sectors. We posit that US Foods’ ability to leverage its scale has paid dividends, as independent restaurant case growth (on an organic basis) has averaged 3.5% over the last seven years, outpacing the industry’s roughly flat transaction growth, according to Euromonitor. And we don’t think management will siphon investment away from its capabilities, as we expect capital expenditures to approximate 1.1% of sales ($2.4 billion in aggregate) over the next five years, ahead of the 0.9% ($1.6 billion) historically expended.

US Foods' second-quarter net sales increased 4.5%, driven by a 2.6% benefit from inflation/mix and a 1.9% lift in volumes. High-margin organic independent case volume grew 5%. Positive mix and cost-saving initiatives helped the company's adjusted EBITDA margin expand 30 basis points to 5.7%.

Despite operating in the highly fragmented and fiercely competitive foodservice distribution vertical, we believe US Foods remains a staunch competitor. The firm has honed its cost structure by reducing complexity, modernizing its infrastructure, and flexing its negotiating clout with suppliers, all while beefing up investment in value-added services, its sales force, and proprietary products to win over lucrative independent restaurants and customers in the healthcare and hospitality sectors. We posit that US Foods’ ability to leverage its scale has paid dividends, as independent restaurant case growth (on an organic basis) has averaged 3.5% over the last seven years, outpacing the industry’s roughly flat transaction growth, according to Euromonitor. And we don’t think management will siphon investment away from its capabilities, as we expect capital expenditures to approximate 1.1% of sales ($2.4 billion in aggregate) over the next five years, ahead of the 0.9% ($1.6 billion) historically expended.

Even against a challenging backdrop, US Foods is building out its toolkit. Investments in services, sales reps, and proprietary products helped drive 3.5% average independent case growth over the past seven years, besting flat industry transaction growth—all while pruning its cost structure.

We are dropping coverage of US Foods. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

After ousting prior CEO Pietro Satriano on May 10 (prompted by activist investor Sachem Head), no-moat US Foods announced David Flitman would assume the helm effective Jan. 5, 2023. Until Flitman joins US Foods’ ranks, interim CEO Andrew Iacobucci will continue to hold the reins, at which time Iacobucci will join the board, increasing the board size to a total of 14 directors. This news does little to sway our long-term prognosis on US Foods (mid-single-digit underlying sales growth and nearly 4% operating margins long term) and our Standard capital allocation rating, based on the firm’s solid investment strategy (it has paid a fair price for acquired assets), sound balance sheet, and appropriate shareholder distributions. As such, we don’t plan to materially alter our $44.50 fair value estimate for US Foods but suggest investors consider stocking up on shares, which trade at around a 30% discount to our valuation.

We think US Foods, the second-largest U.S. food-service distributor after narrow-moat Sysco, has emerged from the pandemic in a stronger position than it was prior to the crisis, given the $1 billion in new business secured as operators migrated to larger, more stable distributors, and the permanent elimination of $100 million in net operating expenses in 2020. US Foods' organic sales returned to prepandemic levels during the second quarter of 2021, and long-term opportunities remain intact. But as US Foods has not demonstrated a cost advantage, organic market share gains (outside of the local restaurant segment), consistent economic returns, or superior profits, we believe the firm does not possess a moat.

No-moat US Foods’ third-quarter results support our long-standing view that the firm is likely to achieve two of its three long-term strategic priorities (expanding gross margins and leveraging operating expenses), while its third objective (gaining market share with restaurants, now 60% of sales) should prove challenging. It appears that US Foods did not gain restaurant share in the quarter, as its 2.9% case growth with independent restaurants lagged the 5.4% growth realized by narrow-moat Sysco and the 4.6% growth experienced by no-moat Performance Food Group. But, as we expected, US Foods expanded its gross margin by 30 basis points to 16.4%, driven by savings in inbound logistics and the effective management of inflation (and deflation in proteins). US Foods also succeeded in leveraging operating expenses, which fell 10 basis points to 13.6% of sales, as savings (new warehouse processes, routing improvements, and an automated warehouse picking technology) more than offset higher labor costs. While wage inflation and turnover are elevated versus last year, these metrics have improved since last quarter and should continue to improve as the softer economic environment is bringing the labor market back into balance. On that front, management stated that overall industry demand was soft in July but improved modestly by September. We expect flat cases for the food service industry and US Foods over the next year, below our 2% long-term forecast, as consumers should eat at home more often to help manage inflation.

We think US Foods, the second-largest U.S. food-service distributor after narrow-moat Sysco, is emerging from the pandemic in a stronger position than it was prior to the crisis, given the $1 billion in new business secured since the onset of the crisis (as operators migrated to larger, more stable distributors), and the permanent elimination of $100 million in operating expenses. We expect US Foods' organic sales will return to prepandemic levels by 2022, with long-term opportunities remaining intact. But as US Foods has not demonstrated a cost advantage, organic market share gains (outside of the local restaurant segment), consistent economic returns, or superior profits, we believe the firm does not possess a moat.

After no-moat US Foods’ second-quarter results, we don’t plan a material change to our $41.50 fair value estimate, as stronger sales are offset by our view that U.S. food-service industry volumes will soften in the next year. While US Foods, like narrow-moat Sysco, is not yet seeing signs of weaker demand, we think this will materialize, as consumers conserve budgets by eating at restaurants less often.

We think US Foods, the second-largest U.S. food-service distributor after narrow-moat Sysco, is emerging from the pandemic in a stronger position than it was prior to the crisis, given the $1 billion in new business secured since the onset of the crisis (as operators migrated to larger, more stable distributors), and the permanent elimination of $100 million in operating expenses. We expect US Foods' organic sales will return to prepandemic levels by 2022, with long-term opportunities remaining intact. But as US Foods has not demonstrated a cost advantage, organic market share gains (outside of the local restaurant segment), consistent economic returns, or superior profits, we believe the firm does not possess a moat.

We don’t plan to materially alter our $40.50 fair value estimate for US Foods after its first-quarter report, leaving shares trading at a 20% discount to our valuation, offering a compelling risk/reward.

No-moat US Foods reported preliminary results for its first quarter ended April 2, including revenue of $7.8 billion (a 24% increase driven primarily by food inflation), topping the $7.5 billion FactSet consensus estimate but falling short of our $8.0 billion mark. Efficiency initiatives reduced operating expenses as a percentage of sales to 13%, compared with our 14.6% estimate for 2022, driven by routing improvements, new warehouse selection technology, and process enhancements. Management confirmed its 2022 outlook for adjusted EBITDA of $1.2 billion-$1.3 billion, compared with our $1.2 billion estimate, and we plan to defer any model adjustments until the quarter’s full results are released on May 12. US Foods’ shares, up slightly on the report, are fairly valued at just below our $40.50 fair value estimate.

We think US Foods, the second-largest U.S. food-service distributor after narrow-moat Sysco, is emerging from the pandemic in a stronger position that it was prior to the crisis, given the $1 billion in new business secured since the onset of the crisis (as operators migrated to larger, more stable distributors), and the permanent elimination of $100 million in operating expenses. We expect US Foods' organic sales will return to prepandemic levels by 2022, with long-term opportunities remaining intact. But as US Foods has not demonstrated a cost advantage, organic market share gains (outside of the local restaurant segment), consistent economic returns, or superior profits, we believe the firm does not possess a moat.

As US Food’s 2021 results were in line with our forecast, we found the more interesting news to be the release of the firm’s three-year plan, including 2024 targets of $1.7 billion in adjusted EBITDA and EPS of $3.40, not far from our marks of $1.6 billion and $3.38 ($3.46 once we reverse our prior assumption that the U.S. corporate tax rate would increase in 2022). Even so, we think it will be difficult for the firm to reach its organic growth goals, as our targets assume ongoing tuck-in acquisitions, while guidance does not.

We think US Foods, the second-largest U.S. food-service distributor after narrow-moat Sysco, will emerge from the pandemic in a stronger position that it was prior to the crisis, given the $1 billion in new business secured since the onset of the crisis (as operators migrated to larger, more stable distributors), and the permanent elimination of $100 million in operating expenses. We expect the increasing availability of COVID-19 vaccines in 2021 will return US Foods' organic sales to prepandemic levels by 2022, with long-term opportunities remaining intact. But as US Foods has not demonstrated a cost advantage, organic market share gains (outside of the local restaurant segment), consistent economic returns, or superior profits, we believe the firm does not possess a moat.

Despite the mid-single-digit drop in the shares of no-moat US Foods, we are pleased with its third-quarter results, as our profit expectations were not as rosy as FactSet consensus. US Foods reported 35% sales growth (compared with our 28% mark and 30% for consensus) driven by 18.5% case growth as the market recovers from the pandemic, 11.5% food inflation, and a 4.9% mix benefit. Total sales were at 94% of the prepandemic level excluding acquisitions, including 101% for restaurants, 92% for healthcare, and 72% for hospitality. Management said the delta variant has not weakened demand, and it even cited an acceleration in volumes in October.

We think US Foods, the second-largest U.S. food-service distributor after narrow-moat Sysco, will emerge from the pandemic in a stronger position that it was prior to the crisis, given the $1 billion in new business secured over the past year (driven in part by smaller competitors strugling to remain viable given anemic demand), and the permanent elimination of $130 million in operating expenses. We expect the increasing availability of COVID-19 vaccines in 2021 will return US Foods' organic sales to prepandemic levels by 2022, with long-term opportunities remaining intact. But as US Foods has not demonstrated a cost advantage, organic market share gains (outside of the local restaurant segment), consistent economic returns, or superior profits, we do not grant the firm a moat.

No-moat US Foods reported second-quarter sales of $7.7 billion, a mid-90% of prepandemic sales (adjusted for acquisitions) by our estimate, besting our expectation for sales that represented a high-80% of the pre-crisis level. By channel, restaurants, healthcare facilities, and hospitality sales were at 105%, 90%, and 60% of 2019 sales, with the latter exiting the quarter at over 70%. Although a recent uptick in the number of COVID-19 cases may slow the pace of the recovery, we now think US Foods’ sales will return to its previous peak by early 2022, from late 2022 previously.

We think US Foods, the second-largest U.S. food-service distributor after narrow-moat Sysco, will emerge from the pandemic in a stronger position that it was prior to the crisis, given the $1 billion in new business secured over the past year (driven in part by smaller competitors strugling to remain viable given anemic demand), and the permanent elimination of $130 million in operating expenses. We expect the increasing availability of COVID-19 vaccines in 2021 will return US Foods' organic sales to prepandemic levels by 2022, with long-term opportunities remaining intact. But as US Foods has not demonstrated a cost advantage, organic market share gains (outside of the local restaurant segment), consistent economic returns, or superior profits, we do not grant the firm a moat.