Sysco’s (SYY) recipe for growth bodes well despite high costs

Sysco Corporation SYY has benefited from its Recipe for Growth program, which builds the company’s sales and supply chain capabilities. The company’s diversified businesses and gains from acquisitions were also a driver.

However, the food company is battling cost inflation like many other industry players.

Let’s go deeper.

Recipe for growth and other drivers

Sysco is making good progress with its recipe for growth and invested $67 million in operating expenses in the fourth quarter of fiscal 2022, particularly to improve the supply chain. The Recipe for Growth program includes five strategic priorities aimed at enabling the company to grow 1.5 times faster than the market by the end of FY24.

The five strategic pillars include improving the customer experience through digital tools. In this regard, the company’s Sysco Shop platform and new pricing software work well. Additionally, the company is focused on improving the supply chain to serve customers efficiently and consistently with better delivery and omnichannel inventory management.

Sysco aims to provide customer-focused merchandising and marketing solutions to increase sales. The company is also aiming for team selling, with a focus on large kitchens. Finally, Sysco is focused on cultivating new capabilities, channels and segments while sponsoring investments through cost reduction initiatives.

Sysco is a diversified company, covering all aspects of the out-of-home food market. The Company’s operations are diversified across different customer types, product categories and geographies.

Sysco caters to restaurants of all price spectrums and types. It is also aimed at healthcare and educational facilities as well as travel and leisure facilities in office buildings. Travel and leisure facilities are undergoing a continuous revival and are expected to be a growth sector in the years to come.

Sysco is targeting 1.35x industry growth in fiscal 2023, which will keep it on track to grow 1.5x industry in fiscal 2024. It expects revenue growth of at least 10% in fiscal year 2023, which will help Sysco surpass annual revenue of $75 billion for the first time.

Management expects acquisitions to contribute to its growth. For fiscal 2023, Sysco forecasts adjusted earnings per share (EPS) of $4.09 to $4.39. The midpoint of this range suggests a 30% increase over adjusted EPS for fiscal 2022. The midpoint of the guidance indicates adjusted EBITDA of approximately $4 billion.

Cost headwinds persist

Sysco has been dealing with product cost inflation in the US foodservice unit for some time now. In the fourth quarter of fiscal 2022, US Broadline experienced product cost inflation of 15.3%, primarily driven by the poultry, fresh produce and dairy categories.

In fiscal 2023, management expects mid-single-digit inflation across all categories, which is expected to decline from highs in the first quarter to lows in the fourth quarter of fiscal 2023. Sysco expects also to an increase in operating costs in the year due to transformation investments and a difficult hiring landscape.

Other players struggling with inflation

Many consumer staples companies are bearing the brunt of cost inflation.

For instance, Church and Dwight CHD has struggled with major cost hurdles. CHD expects additional cost inflation of $135 million in 2022, or $50 million more than its prior expectation.

Church & Dwight said incremental inflation is primarily associated with raw materials and packaging materials as well as the pass-through of similar costs from third-party manufacturers.

B&G Foods BGS is fighting cost inflation, which weighs on its gross margin. On its latest earnings call, BGS management said it expects input cost inflation to have a significant effect on the entire industry over the remainder of the year. financial year 2022.

B&G Foods expects to continue to see significant inflation in the cost of inputs, such as ingredients, packaging, labor and transportation, due to factors such as the pandemic, the war in Ukraine, the weather conditions, supply chain obstacles and labor shortages.

Flowers Food FLO is facing major hurdles due to cost inflation and supply chain bottlenecks. In the second quarter of fiscal 2022, FLO’s materials, supplies, labor and other production costs (excluding depreciation and amortization) increased by 240 basis points (bps) to 51.9 %. This is the result of increased spending on ingredients and packaging, which led gross margin to contract by 240 basis points to 48.1%.

Flowers Foods expects inflation to peak in the third quarter.

Coming back to Sysco, the aforementioned benefits are likely to help the company combat inflationary challenges and stay on the growth path.

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