Sysco Misses Q3 Earnings, Fx & Margin Pressure Continues - Analyst Blog

Global food products maker and distributor Sysco CorporationSYY reported weak third quarter of fiscal 2015 results.

Adjusted earnings of 40 cents missed the Zacks Consensus Estimate of 41 cents by 2.4%. However, it increased 5.3% year over year as an improvement in sales made up for the ongoing gross margin pressure. Unfavorable currency translations possibly resulted in the miss.

Quarter in Detail

Sysco's sales of $11.747 billion lagged the Zacks Consensus Estimate of $11.990 billion by 2%. However, sales grew 4.2% on a year over year basis in the third quarter of fiscal 2015, driven by 2.5% volume growth (including acquisitions). Acquisitions contributed 0.6% to sales growth, while currency translation lowered sales by 1.3%.

Gross profit improved 3.1% to $2.1 billion in the quarter, while gross margin declined 17 basis points to 17.52% due to the ongoing cost pressure. Adjusted operating income declined 2.7% in the quarter to $377 million due to a 4.5% increase in adjusted operating expenses.

Sysco-US Foods Merger Update

Sysco has filed a memorandum in the U.S. Federal District Court for the District of Columbia in opposition to the U.S. Federal Trade Commission's (FTC) efforts to block its takeover of US Foods (announced in Dec 2013).

Earlier on Feb 19, the U.S. government filed a lawsuit to block the Sysco-US Foods proposed merger, saying that the deal would eliminate competition in the sector. (Read: Will Sysco Win Antitrust Lawsuit on US Foods Deal? )

FTC believes this preliminary conjunction would temporarily stop the deal while an FTC administrative law judge hears the case. The court's hearing on the FTC motion is scheduled to begin on May 5.

Other Financial Updates

Cash and cash equivalents were $5.09 billion at the end of Mar 28, 2015, compared with $4.91 billion as of Dec 27. Long-term debt was $7.28 billion at the end of the third quarter compared with $7.25 billion at the end of the second quarter.

Our Take

We are encouraged by the fact that the company is consistently showing improvement in sales driven by acquisitions and volume growth. However, currency headwinds and declining gross margin continue to put pressure on earnings.

Amid the challenging macroeconomic environment, the company's growth strategy focuses on accelerating sales, reducing costs and mitigating the ongoing gross margin pressure. We expect to see gradual improvement in these areas through 2015. We are also hopeful that the plan to divest some of the assets of US Foods will help to gain FTC's approval.

Sysco has a Zacks Rank #3 (Hold).

Better-ranked food companies in the industry include Supervalu Inc. SVU , The Hain Celestial Group, Inc. HAIN and Post Holdings Inc. POST . All of them hold a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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