Sysco (SYY) Q2 Earnings Top on Higher Margins, Sales Meet

Global food products maker and distributor Sysco Corporation 's SYY second-quarter fiscal 2017 earnings exceeded expectations. The revenues however, were in line. The acquisition of London-based Brakes Group (completed in Jul 2016) and margin improvement probably drove the earnings beat.

Adjusted earnings (excluding one-time items) of 58 cents per share surpassed the Zacks Consensus Estimate of 54 cents by 7.4% and were up 20.8% year over year. Growth in sales, expense management, and improved gross and operating margin led to the upside. Excluding the Brakes acquisition, earnings increased 6.3% to 51 cents per share.

Sysco Corporation Price, Consensus and EPS Surprise

Sysco Corporation Price, Consensus and EPS Surprise | Sysco Corporation Quote

Quarter in Detail

Sysco's sales of $13.5 billion were in line with the Zacks Consensus Estimate and increased 10.7% on a year-over-year basis in the second-quarter fiscal 2017. Excluding the Brakes acquisition, sales dipped 0.2% to $12.1 billion.

Gross profit improved 19.2% to $2.6 billion in the quarter, while gross margin improved 137 basis points (bps) to 19.1%. The improvement was backed by the company's ongoing growth strategy, which focuses on accelerating sales, reducing costs and mitigating ongoing gross margin pressure. Excluding the Brakes acquisition, gross profit margin increased 55 bps to 18.3%.

Adjusted operating income also rose 27.7% in the quarter to $558 million despite a 17.1% increase in adjusted operating expenses. Adjusted operating margin improved 55 bps to 4.2%. Excluding the Brakes acquisition, operating income was up 12.6% to $492 million.

We are impressed with the fact that Sysco has delivered higher gross margins for the last seven consecutive quarters, after witnessing declining gross margins over the last two fiscal years due to multiple factors. It seems that the company's growth strategy is paying off and its efforts to boost sales and margins are bearing fruit. The company's sales have also improved consistently, driven by acquisitions and volume growth.

In fact, Sysco's shares have been outperforming the Zacks-categorized Food-Miscellaneous/Diversified industry over the past one year. The stock has increased significantly by 21.9% in comparison to the Zacks-categorized Food-Miscellaneous/Diversified industry, which recorded a growth of only 14.2%. Notably, the industry is part of the bottom 46% of the Zacks Classified industries (142 out of the 265). The broader Consumer Staples sector is placed at the bottom 13% of the Zacks Classified sectors (14 out of 16).

Segment Details

Owing to the completion of the Brakes acquisition, the company will now report results based on four operating segments: the largest of which are U.S. Foodservice Operations and International Foodservice Operations.

U.S. Foodservice Operations

Segment sales declined 0.5% to $9.1 billion. Gross profit increased 3.6% to $1.8 billion, while gross margin expanded 81 bps to 20.1%. Adjusted operating income was $682 million, up 9.0% from the year-ago period, despite 0.7% higher operating expenses.

Local case growth within the company's U.S. Broadline operations grew 1.6% during the quarter. Total case volume was flat.

International Foodservice Operations

Segment sales doubled to $2.6 billion in the second quarter. Adjusted operating income increased 158% to $111 million. The significant improvement in both sales and operating income is primarily attributable to the Brakes Group acquisition.

Other Financial Updates

Cash and cash equivalents were $847.3 million as of Dec 31, 2016, compared with $759.9 million as of Oct 1, 2016. Long-term debt at the end of the second quarter was $8.13 billion, compared with $7.84 billion at the end of the preceding quarter.

Zacks Rank

Sysco holds a Zacks Rank #3 (Hold).

Some well-positioned food stocks in the industry include Lamb Weston Holdings Inc. LW , ConAgra Foods, Inc. CAG and Campbell Soup Company CPB .

Lamb Weston has long-term earnings growth rate of 3.24% and holds a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

ConAgra has long-term earnings growth rate of 8.00%.

Campbell has a growth rate of 5.56%.

Both ConAgra and Campbell carry 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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