Sysco Earnings: Macro Headwinds Limit Near-Term Margin Recapture; Shares Fairly Priced

Narrow-moat Sysco SYY 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 continue to think Sysco is well positioned to navigate the current environment, with the firm posting positive case growth in both its U.S. broadline (up 2.3%) and local (up 0.8%) segments despite declining restaurant guest traffic. The firm continues to operate at about 1.5 times industry margin levels, attributable to a combination of a larger, more profitable independent restaurant business, high private-label penetration (37% and 47% in the domestic broadline and local segments, respectively), and procurement scale. Nevertheless, with flat to slightly positive inflation anticipated in fiscal 2024, we expect to sharpen our pencils on near-term margin recapture forecasts. More concretely, we now expect a 4.8% and 7.9% five-year cumulative annual growth rate in sales and operating profit between fiscal 2024 and 2029, respectively, against our 4.1% and 9.2% prior estimates.

On balance, guidance of 5%-10% growth in 2024 adjusted EPS is positive, if lower than initially contemplated. The firm’s investments in Sysco Perks, its digital platform, and the profitable local restaurant segment strike us as prudent long-term investments—and should drive market share gains for the foreseeable future.