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Sysco (SYY) Hurt by Elevated Costs, Recipe for Growth Aids

Sysco Corporation SYY has been battling cost inflation like many other industry players. On its second-quarter earnings call, management lowered its bottom-line guidance for fiscal 2023. That being said, the company has been benefiting from its Recipe for Growth program, which is strengthening the company’s capacities across sales and the supply chain.

Cost Woes & Lowered Guidance

Sysco has been encountering product cost inflation in the U.S. Foodservice unit for a while now. In the second quarter of fiscal 2023, the company witnessed product cost inflation of 8.3%, which was measured by estimated changes in product costs, mainly in the dairy, frozen food and fresh produce categories.  The persistence of such trends poses threats to margins.

Management’s updated view for fiscal 2023 includes factors, such as softer-than-originally-planned market volumes, greater-than-planned operating costs, solid margin management and gross profit per case and lower corporate expenses. Management stated that the third quarter is usually the lowest volume quarter, while the fourth quarter is the highest volume quarter.

Sysco now expects earnings per share in the band of $4-$4.15, suggesting 23-28% growth from the year-ago period. On its first-quarter earnings call, management guided adjusted EPS in the range of $4.09-$4.39 for fiscal 2023, suggesting 26-35% growth. The guidance includes the expectations of macroeconomic volatility and a potential decline in food-away-from-home demand.

Other Players Grappling With Inflation

Many consumer staple companies are bearing the brunt of cost inflation. For instance, Campbell Soup CPB has been battling major cost hurdles. CPB expects to keep witnessing cost inflation throughout fiscal 2023. Campbell Soup’s adjusted gross profit margin contracted 30 basis points (bps) to 32.2% in the first quarter due to continued cost inflation and increased other supply-chain costs and an unfavorable volume/ mix.

B&G Foods BGS has been battling cost inflation, which is weighing on its gross margin. On its last earnings call, management stated that it anticipates inflation to linger in fiscal 2023 but at reduced rates (5-6%). It expects increased pressure on the prices of tomatoes and glass, among others. Also, B&G Foods continues to see increased prices of core commodities, such as soybean oil, wheat and corn to name a few.

Flowers Foods FLO is battling major hurdles due to cost inflation. In the fourth quarter of fiscal 2022, FLO’s materials, supplies, labor and other production costs (excluding depreciation and amortization) escalated by bps to 53.2% on rising input cost inflation. Flowers Foods expects inflation to continue in 2023 at a declining pace.

Sysco’s Recipe for Growth a Breather

Sysco’s Recipe for Growth program involves five strategic priorities aimed at enabling the company to grow 1.5 times faster than the market by FY24 end. The five strategic pillars include enhancing customers’ experiences via digital tools. In this regard, the company’s Sysco Shop platform and the new pricing software are working well.

Further, SYY is focused on improving the supply chain to cater to customers efficiently and consistently with better delivery and omnichannel inventory management. Sysco aims at providing customer-oriented merchandising and marketing solutions to augment sales.

The company also targets having team-based selling, with an emphasis on important cuisines. Finally, Sysco is focused on cultivating new capacities, channels and segments alongside sponsoring investments via cost-saving initiatives.

These upsides, together with the company’s diversified operations, are likely to work well for Sysco amid cost headwinds.

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