SYY – Profitable Sales Growth Remains Elusive

nicklipinski

SYY reported Q2 earnings this morning, and the results provide a useful framework to reiterate some of our ongoing concerns that we have highlighted in our prior work.

  • Sales increased 4.1% (consensus contemplated a 5.2% increase, so a revenue miss of $122 million versus expectations)
  • Food inflation decelerated sequentially (part of our negative thesis on the company) to 0.8% in Q2 from 2.1% in Q1
  • “Real” sales growth for the company (defined by SYY as reported sales growth less inflation and acquisitions expressed on a currency neutral basis) was 2.0%, a sequential improvement of 200 bps, but against an 800 bps easier comparison
  • Pricing in the quarter was -0.7%, the worst result in over a year (not a concern of ours so much as a component of what we see as a structurally unattractive industry)
  • EBIT declined $37 million (EBIT margin declined 51 bps) even with the benefit of the company’s ongoing cost savings initiatives – our results exclude the expenses associated with the company’s Business Transformation Project

While adjusted EPS met consensus (with some help from the tax rate), the quarter highlights the company’s struggles to profitably grow sales.

  • When we marry these fundamental industry concerns to the company’s likely near and medium term news flow surrounding the acquisition of U.S. Foods and associated integration risk, including regulatory actions and the potential loss of business, we continue to believe that the stock is a source of funds in 2014

Material downside in the shares is likely limited by the prospect (hope?) of more substantial EBITDA growth subsequent to the merger; but we remain on the sidelines, skeptically.

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