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Sysco Earnings: Sluggish Traffic and Inflation Drag on Top Line; Shares Slightly Cheap

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Narrow-moat Sysco SYY 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.

We believe that it behooves investors to consider underlying strength in the business, with traction in the firm’s rewards program, ongoing improvements to its customer relationship management engine, and strong private-label penetration (36.6% of broadline sales, 46% of local cases) positioning Sysco well in a normalizing demand environment. The largest foodservice distributor continues to capture market share, with management suggesting that it’s on track to hit its 1.35 times market-level growth and 10% nominal sales growth targets for the fiscal year.

Nevertheless, Sysco remains sensitive to macroeconomic pressure, and a U.S. broadline clientele that skews toward full-service and independent restaurants is likely more cyclical than the quick-service restaurants that make up Sysco’s Sygma segment (10.4% of quarterly turnover). We expect anemic sales growth in fiscal 2024 amid deflation and declining restaurant traffic, even as the firm outgrows its competitive set. We forecast 5% average annual growth in sales and a 4.7% average operating margin (GAAP) between 2023 and 2027.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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