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Will Sysco Rebound as Restaurants Reopen?

By Pearl Wang – Jun 23, 2020 at 8:10AM

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Sysco's shares have underperformed the market this year, but its business is looking to rebound as COVID-19 stresses ease.

Food service giant Sysco's (SYY -1.08%) shares are down almost 36% year-to-date (versus a 3.5% decline for the S&P 500) as it suffers the adverse effects of the coronavirus pandemic along with so many other companies. But the restaurant supply specialist is hoping for a rebound as restaurants and other entities it services across the country begin to reopen.

Many restaurants are still operating under decreased capacity to conform to government guidelines on their operations under COVID-19, and consumers may be facing economic pressures decreased confidence that requires they cut back on restaurant spending. However, Sysco is counting on some upward bump in demand from reopening restaurants. The food distribution company is also implementing strategies to bolster its balance sheet and help manage these lower business levels for the time being. Is the worst of the pandemic over for this company?

A Sysco delivery truck sits on a roadway in a city with skyscrapers in the background

Image source: Sysco.

As restaurants reopen, Sysco's revenue should benefit

For its fiscal 2020 third quarter (which ended March 28, 2020), Sysco reported a revenue decrease of 6.5% to $13.7 billion, which fell below consensus expectations of $13.9 billion. Earnings were also below analyst expectations. Unsurprisingly, the food service company's business saw dramatic drops due to the pandemic, across all of its business lines.

However, Sysco's revenue started improving in April, and management saw further improvement in May as restaurants began to reopen in some parts of the U.S. As more of the U.S. economy and restaurants reopen, Sysco's revenue has been picking up sequentially each week. According to research firm Baird's weekly survey of restaurant executives, the week ended May 24 showed a 31% improvement from late March and was the sixth week where sales improved.

Sixty-two percent of Sysco's revenue comes from the restaurant sector, which is its largest customer segment. While the consumer discretionary company will see a lift as restaurants recover, it could be affected by some restaurants that have lower business volume. There are strict regulations in many areas limiting restaurant capacity and operations, which may keep some from rebounding as quickly. The other 38% of Sysco's revenue comes from education, retail, travel & leisure, government and healthcare. Business from some of these travel and retail customers may have decreased with closures and social distancing, but segments like government and healthcare may offset this with increased demand.

In order to offset some of the decreased volume from impacted restaurants, Sysco is pivoting to innovative offers for its customers like bundling cleaning products, takeout containers, paper goods, and personal protective equipment (PPE) for those restaurants and other institutions that have been having trouble finding needed equipment.

"By keeping our customers in stock with these essentials, we are helping enable their business to pivot to takeout and delivery and helping them keep their kitchens safe and clean," VP of Corporate Affairs Neil Russell said.

Sysco is also assisting thousands of restaurant clients by helping them develop digital platforms to drive customer traffic and business. The company is providing tools and solutions to help clients boost their home delivery, customer engagement, and takeout capabilities.

Sysco's financial position is strong

The company has a strong balance sheet that will allow it to survive the recession and any further impact from a potential second wave of COVID-19. CEO Kevin Hourican said on the third-quarter earnings call, "We have built more than $6 billion of cash and available liquidity that allows for not only financial flexibility and survivability during this crisis but will enable us to capitalize on an unprecedented competitive opportunity."

Sysco has already cut $500 million from expenses in the fourth quarter. On top of decreasing labor expenses, Sysco has reduced miles driven by rerouting its fleet, as well as other technology improvements. It's also cutting capital expenditures to focus on business-critical projects.

While there is still uncertainty around the recovery for restaurants and the overall economy, Sysco appears to be fairly well-positioned to navigate the volatility. Its revenue should also see a boost as restaurants' revenues improve from recent trough levels. Investors looking for long-term stable businesses should consider adding shares of Sysco, as it's is a well-run company with financials that will allow it to survive the recession. 

Pearl Wang has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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