Sysco Earnings: Deflation and Sluggish Industry Volume Continue to Pinch 2024 Prospects

Narrow-moat Sysco SYY 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’re particularly encouraged by management’s ability to reign in spending in a challenging environment, with the firm making progress toward its goal of cutting $100 million in corporate spending during fiscal 2024. Sysco remained disciplined in pricing, even abandoning an unprofitable contract in its SYGMA segment (which skews toward national quick-service restaurants), seeing that segment’s operating profit more than double (to north of $13 million) despite a modest annual contraction in net sales (down 1.4%). The firm continues to compete well on the basis of strong digital capabilities, its “Sysco Your Way” loyalty program, breadth of selection, particularly as it adds tuck-in specialty acquisitions, and ease of integration.

On balance, we continue to expect GAAP operating profitability in the neighborhood of 4% over the near term, with the firm forced to navigate lower commodity cost inflation than normal and sluggish case volumes in the restaurant space. Longer term, we foresee a route to high-4% margin, driven by growth in the firm’s more profitable local case volumes, increasing private label penetration, and ongoing cost savings initiatives.