Sysco Profit Declines Amid Weather Woes--Update

By Annie Gasparro 

Sysco Corp. is trying to persuade customers that intense competition necessitates its planned merger with rival US Foods Inc. But its ever dwindling profit margins may speak louder than words.

Sysco, the biggest U.S. food distributor, on Monday reported its net profit fell 10% in the latest quarter despite a 3.2% increase in revenue to $11.28 billion. The company blamed "unusually severe" winter weather in January and February for exacerbating the higher delivery expenses and slow sales growth in the restaurant industry that have long been weighing on Sysco's profits.

Regulators are currently reviewing Sysco's proposed $3.5-billion acquisition of US Foods, number two in the industry. The combined company would have more leverage to negotiate prices on the food and supplies it distributes to restaurants, hospitals and other institutions. Some smaller customers and rival distributors have expressed worry about the increased buying and pricing power the combined company would have, given its roughly 25% share of industry sales.

Houston-based Sysco has said it would pass on the cost savings to its customers, which it says is necessary to compete with specialty distributors and carryout retailers like Restaurant Depot. Sysco says such rivals are eating away at its sales to smaller restaurants, which carry higher profit margins for it than large chains.

Despite the weakness of the first two months, Sysco said March and April sales trends have been significantly stronger. Its shares rose nearly 3% in midday trading Monday.

Sysco executives said the acquisition of US Foods remains on track to close in the fall.

Executives have acknowledged that the merged company likely would lose some customers who are skeptical of the combined entity's clout or who are wooed by rivals that swoop in while Sysco and US Foods are distracted.

But Chief Executive Bill DeLaney said meetings with customers have gone well. "They have a lot of questions. And as you can imagine, one of their key questions is to what extent this will disrupt service," he said. "As time has gone on, we have been able to explain the reasons for the merger and the opportunities and some of the challenges that come with that in the early days of the transition."

Higher inflation in meat and dairy will help Sysco's revenue in the current quarter, but that pressures gross margin and poses a threat to customers.

"It's challenging at times to pass that along as fast as you might like to the customers; sometimes that's not even the right thing to do," Mr. DeLaney said, explaining that salespeople instead can work with customers to add more poultry to their menus when beef costs are high, for instance.

"We don't want to see a lot of inflation...it's not good for our customers," he said. "But I think we'll manage it well...and I think some of this will be with us for a while."

For the quarter ended March 29, Sysco reported a profit of $180.9 million, or 31 cents a share, down from $201.4 million, or 34 cents a share, a year earlier. After adjusting for certain merger- and legal-related expenses, earnings fell to 38 cents from 40 cents a share.

Analysts' had expected a 39 cent per-share profit and $11.38 billion in revenue, according to a poll by Thomson Reuters.

Ben Fox Rubin contributed to this article.

Write to Annie Gasparro at [e-mail]

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