First the bad news: Sales have slowed at SYSCO (NYSE:SYY), the nation's largest food distributor, and inflationary pressures have contracted margins. The good news: The company still managed to extend its winning streak, posting record revenues and earnings for the 28th consecutive year. Earnings rose 16.7% to $907.2 million (or $1.37 per share) from $778.3 million last year on sales that climbed 12.2% to $29.3 billion.
The impact of product inflation, particularly in the dairy and meat categories, continues to be a concern. Price increases of 8% for the fourth quarter (6.3% for the year) were largely passed on to customers and recouped, but the end result was a slight reduction in gross profit margins. Sales for the period rose 16.7% to $8.14 billion but would have essentially been flat without the impact of rising prices and the benefit of an extra operating week. Earnings per share jumped 16.2% to $0.43, a penny shy of estimates.
This protracted period of sustained high prices has eased demand from SYSCO's 420,000 customers, which include hospitals, schools, and hotels, as well as fast-food chains such as Wendy's (NYSE:WEN). The company has countered by trimming costs and growing leaner. More efficient delivery routes helped reduce operating expenses to 13.66%, which represents year-over-year and sequential declines of 34 and 69 basis points, respectively.
Over the past five years, net margins have improved by 100 basis points to 3.1%. While in absolute terms this may seem razor-thin, the rate is double the industry average and triple the 1.0% of Performance Food Group (NASDAQ:PFGC), the third-largest player in the group.
While sales growth may have moderated, the slowdown is likely temporary. It's a safe bet that demand for food will eventually pick up, particularly after inflation falls back in line. Meanwhile, SYSCO still trounced the 7.5% rise in sales posted by its closest competitor, Royal Ahold's (NYSE:AHO) US Foodservice, and increased its share of the global $200 billion food distribution market last year by a full point to 14%. Until the top line recovers, SYSCO's above-average yield and cost-cutting initiatives provide other incentives.
For more on SYSCO, read Bill Mann's coverage in Syzzlin' SYSCO.
Fool contributor Nathan Slaughter owns none of the companies mentioned.
