Sysco Earns 44 Cents Per Share

Bad news from Sysco (SYY). The company earned 44 cents per share, three cents below expectations due to higher food costs.

Sysco began to see revenue improve last year as more consumers started eating meals out again, coming out of the recession. But now higher costs are standing in the way of real revenue growth.

The company, the largest food-service distributor in the U.S., said food cost inflation of 4.5%, driven by ongoing double-digit increases in meat, dairy and seafood prices, hurt its customers’ food purchasing budgets for the quarter, just when demand should have been increasing from consumers going out to eat more. In the year-earlier period, Sysco benefited from deflation of 3.5%.

Like the restaurants that it serves, Sysco faces the challenges of balancing how much of its rising costs can be passed on to its customers. While Sysco also has hospitals, schools and other institutions as customers, its restaurant base makes up the majority of its business and that industry took the brunt during the economic downturn.

Sysco Chief Executive Bill DeLaney said in a news release that the fiscal second-quarter results “reflect the unfavorable impact of certain market conditions and operational challenges that we were unable to fully overcome in the near term…. Looking forward, we are highly focused on improving the execution of our business plan in the second half of our fiscal year.”

This was a very disappointing report from Sysco. The stock dropped more than 6% today. Fortunately, the stock is still a good value and it pays a nice dividend. Going by today’s close, the yield is 3.7%.

This is what the CEO had to say on the earnings call:

In assessing our performance for the quarter and for that matter, the first half of our fiscal year, we clearly struggled to achieve some of our key business objectives. Market conditions definitely contributed to our struggles. However, there is no doubt that we have opportunities to improve the execution of our business plan as we move into the second half of our fiscal year. Such improvement is a top priority for me and our entire leadership team.

Looking forward, I’m highly confident the Sysco is well positioned to grow our business profitably and at a faster rate than our $210 billion market growth over the longer term. We do believe that we are in the early stages of an economic recovery based upon our trends throughout calendar year 2010. However, as we saw on the second quarter, that recovery and to some extent, our financial results, may be somewhat choppy due to the economic challenges that consumers continue to face.

Our operating cash flow remains strong and our strategy, which we presented in detail at our Investor Meeting in early December, is sound. As you may recall, our strategy is customer centric in nature with the strong emphasis on operational excellence. Our associates throughout Sysco continue to provide dedicated support and excellent service to our customers. Our business review process is more targeted than ever, and the quality of these reviews improves each year. While fuel cost increases in the impact of nearly 5% inflation in our overall product portfolio created pressure on delivery and selling expenses, we did experience productivity improvements in our warehouse operations and administrative support functions in the second quarter. We’re also encouraged by the current level of quality acquisition opportunities in the marketplace.

This was a rough quarter for Sysco but I think the problems are manageable.

Posted by on February 7th, 2011 at 10:58 am


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