Sales in the quarter were $10.6 billion, an increase of 8.6% from the $9.8 billion reported in the first quarter of last year (lapping 7.4% growth in Q1 2011). This increase was largely driven by food cost inflation (7.3%), marking the sixth consecutive quarter of sequential increases in inflation for Sysco; the remainder of the growth was split evenly between acquisitions and positive foreign exchange benefits at 0.7% a piece.
Gross profit for the first quarter was $1.9 billion, an increase of 5.5% compared to the same period last year. As a result of the underperformance relative to sales growth, gross profit margin declined 53 basis points to 18.4%, due to high inflation rates combined with only modest volume growth.
Operating income for the quarter was $509 million, an increase of 0.6% year over year and the highest first quarter total in the company’s history. Excluding gross business transformation expenses ($16 million increase YOY) and the impact of corporate-owned life insurance (COLI; $13 million impact), adjustedoperating income increased 6.1% to $546 million.
Diluted EPS was $0.51 on a GAAP basis, flat with Q1 2011 EPS; included in the quarter was $0.04 of negative impact from gross business transformation expenses, compared to a net zero effect in Q1 2011 ($0.02 benefit from COLI, $0.02 negative impact from gross business transformation expenses); on an adjusted basis, EPS was $0.55, an increase of 7.8% compared to the first quarter of last year.
The biggest initiative currently being undertaken at Sysco is the Business Transformation Project, which was launched in fiscal 2009 to implement an enterprise-wide integrated software system; as of the end of fiscal 2011, management had substantially completed the design and build phase of the project and was testing the underlying system and processes through a pilot implementation. As they noted in the annual report, they were taking additional time through the start of this year to improve the underlying system prior to large scale deployment, an action that caused a delay in the project of approximately 6-12 months (along with higher costs); here is what CEO William DeLaney said on the call to update investors about that progress:
“Turning to our multiyear Business Transformation Project for a moment, we are implementing this month a significant system enhancement at our Arkansas location. We will then assess performance, address any concerns and move forward to our second facility. Once we have achieved a successful implementation at the second facility, we will update our rollout schedule and long-range projections of the cost and benefits of the project. It is imperative that we remain disciplined in our approach as we move forward to ensure that the larger rollout of future waves will be successful.”
For the year, the company expects to spend $250-275 million in gross business transformation expenses. Gross project expenses related to the Business Transformation Project were $102.0 million in fiscal 2011, $81.1 million in fiscal 2010, and $35.7 million in fiscal 2009.
Shares in the company were relatively in line with the market, moving 0.14% higher for the day compared to 0.61% for the S&P 500; SYY currently trades for just under 14 times consensus analyst estimates for this fiscal year.
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I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.