Sysco (SYY) Q3 Earnings Match Estimates, Revenues Beat

Global food products maker and distributor, Sysco Corporation (NYSE:SYY) came out with third-quarter fiscal 2017 results, wherein earnings met expectations after posting positive earnings surprises for five straight quarters. However, the top line outpaced the estimates after missing the same in the previous quarter.

Adjusted earnings of 51 cents per share rose 10.96% year over year but came in line with the Zacks Consensus Estimate. Growth in sales, expense management, and improved gross and operating margin led to the upside. Excluding the Brakes acquisition, earnings increased 8.7% to 50 cents per share.

On a GAAP basis, earnings advanced 15.8% to 44 cents per share.

Quarter in Detail

Sysco's sales improved 12.7% to $13.5 billion and also came ahead of the Zacks Consensus Estimate of 13.1 billion. Excluding the Brakes acquisition, sales grew 2.3% to $12.3 billion.

Gross profit jumped 18.3% to $2.5 billion in the quarter, while gross margin improved 89 basis points (bps) to 18.7%. The improvement was backed by the company’s ongoing growth strategy, which focuses on mitigating gross margin pressure by accelerating sales and reducing costs. Excluding the Brakes acquisition, gross margin increased 34 bps to 18.2%.

Adjusted operating income rose 14.3% to $500 million in the quarter despite a 19.3% increase in adjusted operating expenses. Adjusted operating margin improved 5 bps to 3.7%. Excluding the Brakes acquisition, the same was up 13.6% to $497 million.

We are impressed with the fact that Sysco has delivered higher gross margins for the eight consecutive quarters now, after witnessing declining gross margins since many quarters due to multiple factors. It seems that the company’s growth strategy is paying off and its efforts to boost sales and margins are bearing fruit. The company’s sales have also improved consistently, driven by acquisitions and volume growth.

In fact, Sysco’s shares have been outperforming the Zacks categorized Food–Miscellaneous/Diversified industry over the past one year. This Zacks Rank #3 (Hold) stock was up 11.2% against the industry’s loss of 2.7%. Notably, the industry is currently placed at bottom 14% of the Zacks Classified industries (219 out of the 256). Further, the broader Consumer Staples sector, of which they are part of, is placed at the bottom 19% of the Zacks Classified sectors (13 out of 16).

Segment Details

Owing to the completion of the Brakes acquisition, the company now reports results based on four operating segments, U.S. Foodservice Operations and International Foodservice Operations, being the largest of all.

U.S. Foodservice Operations

Segment sales rose 2.2% to $9.2 billion. Gross profit grew 4% to $1.8 billion, while gross margin expanded 35 bps to 19.9%. Adjusted operating income was $689 million, up 7% from the year-ago period, despite 2.3% higher operating expenses.

Local case volume within the company’s U.S. Broadline operations improved 3.5% in the quarter. Also, the total case volume rose 1.8%.

International Foodservice Operations

Segment sales came in at $2.5 billion in the quarter versus $1.3 billion in the year-ago quarter. Adjusted operating income grew 21.2% to $40 million. The significant improvement in both the sales and operating income was mainly driven by the Brakes acquisition.

Other Financial Updates

Cash and cash equivalents were $855.1 million as of Apr 1, 2017 compared with $610.8 million as of Mar 26, 2016. Long-term debt at the end of the third quarter was $8,026.6 million, compared with $4,274.9 million in the year-ago quarter. Further, total shareholders’ equity as of Apr 1, 2017 was $2,330.5 million.

As of Apr 1, 2017, capital expenditures, net of proceeds from sales of plant and equipment, were $395 million. While, cash flow from operations came in at $1 billion, free cash flow at the end of the quarter was $630 million.

Stocks that Warrant a Look

Better-ranked stocks in the same industry include Aramark (NYSE:ARMK) , Conagra Brands, Inc. (NYSE:CAG) and Lamb Weston Holdings, Inc. (NYSE:LW) all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Aramark, with a long-term earnings growth rate of 12.8% has increased 9.7% in the past three months.

Conagra Brands, with a long-term earnings growth rate of 8% has posted an average earnings beat of 10.7%.

Lamb Weston, with a long-term earnings growth rate of 4.2% has surged 37.1% in the past six months.

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