Sysco (SYY) Tops Q3 Earnings & Sales On Improved Margins

Global food products maker and distributor Sysco Corporation (NYSE:SYY) posted better-than-expected third quarter of fiscal 2016 results, wherein both revenues and earnings beat estimates. Focus on acquisition and margin improvement probably resulted in the beat.

Adjusted earnings of 46 cents per share beat the Zacks Consensus Estimate of 42 cents by 9.5% and were up 15% year over year. Growth in sales, expense management and improved gross and operating margin led to the growth.

Quarter in Detail

Sysco's sales of $12.00 billion marginally beat the Zacks Consensus Estimate of $11.91 billion by 0.7%, and increased 2.2% on a year-over-year basis in the third quarter of fiscal 2016, as volume growth was offset by unfavorable currency impact of 1.0%. Case volume for the company's U.S. Broadline operations grew 3.6%, while local case growth within U.S. Broadline operations grew 3.4%. Acquisitions contributed 0.9% to sales growth.

Gross profit improved 4.1% to $2.1 billion in the quarter, while gross margin improved 34 basis points (bps) to 17.9% due to the company’s ongoing growth strategy, which focuses on accelerating sales, reducing costs and mitigating ongoing gross margin pressure.

Adjusted operating income also increased 16% in the quarter to $438 million despite a 1.5% increase in adjusted operating expenses. Adjusted operating margin improved 43 bps to 3.65%.

Food cost deflation was 0.4% as the company witnessed deflation in the meat, poultry and seafood categories, partially offset by modest inflation in other categories.

Other Financial Updates

Cash and cash equivalents were $610.8 million at the end of Mar 26, 2016, compared with $595.6 million at the end of Dec 26, 2015. Long-term debt at the end of the third quarter was flat sequentially at $4.27 billion.

Our Take

We are impressed by the fact that Sysco has delivered higher gross margins for the last four consecutive quarters, after witnessing declining gross margins since the last two fiscal years 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 fruits.

The company’s sales have also improved consistently driven by acquisitions and volume growth. Though the termination of the long-awaited merger agreement with US Foods in June was disappointing, the company still remains positive on the acquisition front and expects to move forward with more such deals. However, the company expects earnings to remain under pressure due to currency headwinds and food cost deflation.

Sysco has a Zacks Rank #2 (Buy).

Other well positioned food companies in the industry include J&J Snack Foods Corp. (NASDAQ:JJSF) , Flower Foods, Inc. (NYSE:FLO) and Kellogg Company (NYSE:K) . All of them carry the same Zacks Rank as Sysco.