A few years back it was reported by The New York Times that Americans consume 31% more processed foods than citizens of other nations. The US wholesale food distribution industry plays a pivotal role in transferring frozen, processed and prepared foods; dairy items; poultry, fish, and meat; fresh produce; and baked goods. Today’s scenario is that people are becoming more and more health conscious as obesity is accelerating its pace. Therefore, consumer preferences are changing, and they are demanding fresher and healthier foods. So, the food distribution industry is going through tough times. On the other hand, the threat of new entrants and competition from rivals is also intense.
Despite of this topsy-turvy situation, SYSCO Corporation (SYY) is playing well with strong financial track record. With a market cap of 21.08 billion, Sysco is the largest North American food service distributor. Whether you dine at a restaurant, college or hotel, there's a good chance the food and related products were delivered by Sysco.
Tracking the Performance
Sysco released second-quarter results for fiscal 2014 on Feb. 3, and sales were $11.2 billion, an increase of 4.1% from $10.8 billion in the second quarter of fiscal 2013. Sales from acquisitions (within the last 12 months) increased sales by 1.9%, and the impact of changes in foreign exchange rates for the second quarter decreased sales by 0.6%. Operating income was $352 million, a decrease of 8.1%, compared to $383 million in last year's second quarter. Excluding certain items and business transformation expenses, adjusted operating expenses increased 3.4%. Net earnings for the second quarter were $211 million, a decrease of $11 million, or 4.8%, compared to the prior year. Diluted EPS in the second quarter of fiscal 2014 was $0.36, which was 5.3% lower compared to last year's second quarter.
Due to ongoing competitive pressure, Sysco’s gross profit improved by only 0.7% to $2.0 billion in the quarter. Adjusted operating income declined 7.6% in the quarter to $448.6 million due to a 3.4% increase in adjusted operating expenses. Cash and cash equivalents were $449.9 million at the end of Dec 28, 2013, compared with $359.5 million at the end of Sept. 28, 2013. Long-term debt was $2.94 billion at the end of the second quarter compared with $2.87 billion at the end of first quarter. Cash flow from operations was $458 million for the first half of fiscal 2014, compared to $387 million in the first half of fiscal 2013, or an increase of 18.5%. Total capital expenditures totaled $135 million for the second quarter, and $270 million for the first half of the year.
Head to Head
Sysco faces stiff competition from ARAMARK Holdings Corp. (ARMK). Based on the recent earnings report, Aramark is ahead of Sysco. Sysco's earnings per share decreased 4.1%, and revenue rose 4.1% year-over-year. On the other hand, Aramark's earnings per share increased by 52.9%, and revenue increased by 6.4%.
This Houston-based company distributes food-service items to some 425,000 customers from 193 locations throughout the U.S., Bahamas, Canada, Ireland & Northern Ireland. Sysco's product lines are as diverse as the 48,100 employees who support its daily operations. Sysco has a broad geographic presence and serves a broad array of customers with a wide spectrum of quality-assured products.
Sysco aims to reach even more people, and for this reason its total capital expenditure is so huge. The company’s primary areas for investment included facility replacements and expansions, replacements to Sysco's fleet, and technology.
On Dec. 9, 2013, Sysco declared a merger agreement with US Foods. This merger will create a world-class foodservice company. The total enterprise value of the transaction is approximately $8.2 billion (inclusive of debt), and the combination has been approved by the board of directors of each company. In this competitive world, this merger will help to improve efficiencies, particularly in supply chain, merchandising, and general and administrative activities. Sysco is constantly expanding its capabilities. A chart has been provided below for further references.
Sysco’s key areas of strategic focus are sustainable profitable growth, operating margin, and asset optimization and free cash flow. Further, the company is implementing major performance enhancements to further increase system speed and scalability, additional operating company rollouts, steady diet of functional enhancements, ERP software upgrade. Sysco is also driving transformational change, and creating greater value for its customers.
On a Concluding Note
Sysco is a solid company for long-term investors. It has a history of increasing dividends, and a strong balance sheet. Over the past few years, Sysco has seen solid growth in revenues.
Graphs Courtesy: Sysco.com
On Feb. 21, 2014, this largest food service distributor declared a regular quarterly cash dividend of $0.29 per share, payable on April 25, 2014, to common shareholders of record at the close of business on April 4, 2014. Sysco has a long-term vision, and therefore it participates in a large market that should experience modest long-term growth. Further, the company is targeting solid operational performance improvement. Sysco’s deal with US Foods will create a separate niche in an increasingly competitive market. The combined companies are expected to have annualized sales of approximately $65 billion, and generate operating cash flow of approximately $2 billion.
Sysco's CEO Bill DeLaney has been serving the company for more than 25 years. Therefore, the company is in a stronger advantageous position than its competitors. With this solid structure, Sysco will strengthen its position in the market. Though Aramark is in a better position than Sysco right now, I believe that in the long run Sysco will reverse the situation. So, this company has a great investment opportunity in the long run.