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Sysco (SYY) to Post Q2 Earnings: Can Endeavors Check Costs?

Sysco Corporation SYY is slated to come out with second-quarter fiscal 2019 results on Feb 4. This provider of food and related products has a mixed record of earnings surprises over the trailing four quarters. Let’s see how the company is positioned ahead of the upcoming quarterly results.

Sysco Corporation Price and EPS Surprise

Sysco Corporation Price and EPS Surprise | Sysco Corporation Quote

What to Expect?

The Zacks Consensus Estimate has gone down in the past 30 days to 72 cents, which however reflects 9.1% growth from the year-ago quarter’s figure. Also, the consensus mark for revenues is $14,853 million, depicting a rise of 3.1% from revenues recorded in the year-ago quarter.

Not All Seem to be Rosy

Like many food companies, Sysco is also reeling under cost-related headwinds for a while now. The company continued to witness this trend in the last reported quarter, mainly due to a tight U.S. labor market. Moreover, gross margin in this segment contracted 7 basis points (bps) to 20.10%, caused by a fall in food-cost inflation in U.S. Broadline, particularly due to deflation in meat, poultry and produce categories.

During the quarter, operating expenses in the U.S. Foodservice unit increased 5.8%, owing to higher supply-chain expenses related to both transport and warehouse. In fact, warehouse and transportation related costs also posed concerns to the company’s SYGMA unit and the International segment’s Canada region. The company’s International unit also incurred increased costs related to investments in integration and transformation, which are likely to linger. Further, higher fuel costs led to escalated U.S. Foodservice unit operating expenses, which also included overtime costs and other costs related to additional hiring owing to a tight labor market. The company expects its warehouse and transportation costs associated with supply chain to persist, which is a threat to margins. Well, escalated costs are posing hurdles for companies like Pilgrim's Pride PPC, TreeHouse Foods THS and Campbell Soup CPB, among others.

Coming back to Sysco, the company’s International segment witnessed a slowdown in the first quarter as Canadian sales were lower than expected, and consumer sentiments were unfavorable in the U.K., with several restaurant closures and Brexit-related worries. Also, a tough operating environment in Mexico hampered Latin America’s performance to an extent. Persistence of these hurdles along with volatile currency movements is a concern for the impending quarter. The Zacks Consensus Estimate for International Foodservice Operations sales stands at $2,892 million compared with $2,869 million reported in the same period last year.

Will U.S. Foodservice Unit, Strategic Plans Offer Adequate Respite?

On the brighter side, Sysco’s U.S. Foodservice unit has been performing well for quite some time now. The robust trend continued in first-quarter fiscal 2019, wherein earnings and sales advanced year over year, mainly buoyed by strength in U.S. Foodservice Operations. Notably, local case volumes in this segment have been rising year over year for 18 consecutive quarters now. Additionally, rising restaurant sales have been benefitting the company’s U.S. Operations for a while. Well, a rosy economic scenario, marked by elevated consumer confidence and favorable consumer spending, is likely to continue working in favor of restaurant sales, thereby being a driver for the U.S. Foodservice segment. The consensus mark for sales at this segment is pegged at $10,010 million for the second quarter, representing growth of 3.4% from sales reported in the year-ago period.

The company is on track with its strategic priorities that are expected to drive growth and fuel value creation. Talking of Sysco’s growth endeavors, the company is on track with its four core plans that include enhancing consumers’ experience, optimizing business, stimulating power of its people and achieving operational efficacy. In this regard, the company focuses on enhancing assortments, making constant innovations, ensuring food safety and revitalizing brands. Further, to evolve with the changing consumer preferences, Sysco is committed toward investing in technology and enhancing e-commerce operations. Moreover, it plans to improve supply chain, increase transparency, enhance deliveries and manage product costs effectively.  

We expect these factors to provide significant respite to Sysco in the quarter to be reported.

What the Zacks Model Unveils

Our proven model doesn’t show that Sysco is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Sysco carries a Zacks Rank #3, its Earnings ESP of -1.01% makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.

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