Recently, US Foods Holding Corp. (NYSE:USFD) reported second-quarter results that outperformed the analyst consensus, despite some continued negative pressure from the pandemic. The stock market responded by bidding up the share values of not just US Foods but also other food suppliers, including Sysco Corporation (NYSE:SYY), The Chef's Warehouse (NASDAQ:CHEF), and Performance Food Group Company (NYSE:PFGC), among several others. But the question remains: How accurate is US Foods as a barometer for food company stocks in the era of COVID-19?
A finger on the foodservice pulse?
US Foods is a massive foodservice distributor with approximately 350,000 products in its lineup and $25 billion in yearly revenue. It is also deeply intertwined with the U.S. restaurant industry. Its size and importance are demonstrated by a successful Federal Trade Commission (FTC) antitrust action, which blocked Sysco's attempted acquisition of US Foods back in 2015. The injunction was granted on the grounds that a merger between the two would create an entity controlling roughly 75% of America's foodservice market.
US Foods is clearly a major player in the restaurant industry's supply chain, arguably making it a potential proxy for the fortunes of other stocks operating in the same marketplace. The company also has a diversified portfolio of products and brands, including the recently bought cash and carry Smart Foodservice (acquired April 2020) and regional food distributor SGA's Food Group of Companies (acquired Sept. 2019). Since its business isn't narrowly focused on one type of restaurant supply but instead relies on a broad-based "multichannel" strategy, it may also be sensitive to trends across a wide range of regions, demographics, and budgets.
Turning to US Foods' actual second-quarter performance, it beat consensus estimates on both the top and bottom lines. An adjusted loss of $0.25 per share beat estimates by $0.10, and revenue of $4.56 billion handily topped expectations of $4.23 billion.
Gross profit declined 41.2% year over year as net sales sank 29.2%. However, CEO Pietro Satriano noted in the earnings release, "As the quarter progressed, we saw trends in volumes, margins and bottom line profitability improve, and we believe our scale, our differentiated platform and our strong balance sheet leave us well positioned to gain market share as the industry continues to recover."
Additional month-by-month detail provided during the earnings call added concrete figures to that statement. Total case volume was down 50% in April, but it recovered to a 20% to 25% loss through May and June before reaching a 13% dip in July. The volumes show sales tracking below normal but gradually recovering and stabilizing.
Taking a more measured approach
US Foods does occupy a leadership position in the U.S. foodservice supply market, but investors should tread carefully generalizing the company's individual gains as positive news for all foodservice stocks.
During the latest earnings call, someone asked if US Foods expected its rebound to be capped at the margins it reached before COVID-19, or if its executives saw room for gains beyond pre-pandemic levels. Satriano and Chief Financial Officer Dirk Locascio responded that such gains might happen, and they identified possible sources of ongoing gains as including supply chain efficiency, the outsized success of some segments or individual private brands, and improved sourcing.
They also pointed to the recently acquired cash and carry Smart Food Service stores as adding both "dollars" and "expansion opportunity" with Locascio remarking, "We expect that we can more than double the stores and the fact that it's more profitable than in the broadline businesses as we continue to grow that."
While it's possible a rising tide after COVID-19 will lift all foodservice companies' boats, a safer and potentially better strategy would be to choose those stocks sharing some of US Foods' specific strengths. These include maintaining a wide range of brands and products to allow more flexible sales during uncertain times, deliberate efficiency measures, and even a strong history of adding smaller companies or brands with growth potential.