Sysco: Struck By Food Inflation

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Brace yourselves for the quarterly numbers of yet another food inflation victim. Sysco (NYSE: SYY  ) , the U.S.' largest food distributor, posted flat net earnings in the first quarter.

Let's dig deeper.

Number crunching
Sysco's sales rose to $10.6 billion, an 8.6% increase compared with the previous year's quarter. This was mainly because the company raised the prices of its products to compensate for higher raw material costs.

Sysco's bottom line grew just 1.2%, remaining nearly flat at $303 million. Barring one-time business transformation expenses, the company reported earnings per share of $0.55.

Pinching pennies
With increasing labor costs and a rapidly growing middle-class population around the world, food crops are falling short of global demand and soaring in price, forcing companies dependent on agricultural products to pay higher raw material costs. Meat processors such as Tyson Foods (NYSE: TSN  ) and Pilgrim's Pride (NYSE: PPC  ) recently posted disappointing quarterly numbers because of high feed prices, as did coffee maker J.M. Smucker (NYSE: SJM  ) .

Not surprisingly, Sysco saw its food costs rise to 7.3% compared with 3.3% in the same period the previous year. Additionally, the company also incurred higher costs for other items like payroll and fuel.

Sysco's income was hurt not just by higher costs, but also by fewer eaters. The company distributes food to restaurants, hotels, college campuses, schools, and hospitals. In the wake of economic uncertainties and weak consumer spending, fewer customers visited restaurants, thereby slowing down many of the businesses that Sysco distributes to. This scenario may change if the economy improves. But until then, Sysco will have to put up with weak demand.

The Foolish bottom line
Sysco is burdened with cost and demand problems, which are pinching both the top and bottom lines. With no relief in sight as far as costly raw materials are concerned, it looks to me like tough times are here to stay for Sysco.

What do you think?

  • Click here to add Sysco to My Watchlist for more analysis.

Navjot Kaur does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Sysco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 06, 2011, at 8:15 PM, CaptJackson wrote:

    This is a helpful article as it touches on the reduced demand for Sysco product with segments of its customer base. As a long time shareholder, I continue to hold my position because (as the article touches upon) SYY is able to raise prices when increased food costs are realized. Customers supplied by SYY know that the Company is often the largest purchaser of a specific food product and there is little likelihood that a competing food supplier could consistently provide a product of comparable quality as cheaply. (On a nation-wide scale) SYY is unique in its ability to package and provide restaurants a customized food product and, for that reason, raw food prices will not likely cause an existing customer to switch from SYY. Other than fuel and other distributions costs, the aforementioned reduced demand is the only significant reason that SYY bottom line is likely to suffer. An annual increase in the dividend is another reason to like SYY for the long haul.

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