Sysco's Sales and Profits Keep Trucking

Even amid a highly competitive operating landscape, narrow-moat

Beyond its internal efforts, we think the most significant factor that stands to impact the business heading into fiscal 2018 surrounds the drastic shift to an inflationary environment (from the deflationary conditions that have characterized the industry over the last two years), particularly reflecting an uptick in produce, poultry, dairy, and seafood costs. But even in the face of cost pressures, we believe Sysco now has a better grasp on its cost structure, as evidenced by the 4% growth chalked up in adjusted gross profit (on top of comparable growth a year ago) that far outpaced the just 1.7% increase in adjusted operating expenses. And we don’t view this as a negative for Sysco’s operations, in line with management rhetoric that 2%-3% inflation tends to be its sweet spot, making the pass-through of these higher costs to its customers (and ultimately the end consumer) fairly seamless and unlikely to result in a significant or lasting erosion in volumes. However, if inflationary trends were to become more pronounced, we portend Sysco could either be forced to bear the brunt of these higher costs--constraining profits--or potentially opt to surrender some of its leading share position and preserve profitability.

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