Sysco Profit Falls 4.8% on Higher Expenses -- Update

By Annie Gasparro 

Sysco Corp. said net earnings fell 4.8% in the latest quarter, reflecting the pressures on its profit margins that are driving the food distributor's planned merger with rival US Foods.

Chief Executive Bill DeLaney said 2013 "was one of the most difficult years in recent history for our industry." He said overall sales by restaurants--which make up about 60% of Sysco's customers--remain flat so far in the current period, not counting new store openings, with the brutal weather in January exacerbating tough market conditions in the East.

Sysco purchases, stores and resells food and other supplies to restaurants, schools and other institutions. Restaurants have faced soft sales for years as consumers are eating out less often, with the biggest pain among the smaller, independent operators who generally provide Sysco with stronger margins than national chains.

Mr. DeLaney said that "the reality in this business for us is we need to grow the local business," which he said "will contribute significantly" to profit growth. He said he thinks Sysco is getting smarter at balancing the need for lower prices to win sales with protecting its profit margin.

For the fiscal second quarter, ended Dec. 28, Sysco's operating profit margin shrank to 3.1% from 4.2% a year ago, largely from higher costs at companies it acquired and business with national chains growing faster than local ones.

Executives hope Sysco's pending $3.5 billion acquisition of US Foods, announced in December, would help reverse that trend. By uniting the nation's two biggest food-distribution companies, Sysco would gain increased leverage in negotiating favorable prices from manufacturers, allowing it to be more competitive with the prices it charges customers. It would also save money by combining distribution routes and sharing technology to improve warehouse efficiency, the company said.

The deal, which is being reviewed by the Federal Trade Commission, has stirred up concerns among some customers and other industry players that it would give Sysco too much power with about 25% of the market. Sysco, along with some small distributors, has said competition is still fierce.

Sysco reported total profit for the latest quarter of $210.8 million, or 36 cents a share, down from $221.4 million, or 38 cents a share, a year earlier, while revenue increased 4.1% to $11.24 billion. Excluding an increase in insurance reserves and other items, adjusted earnings were flat at 40 cents.

Analysts polled by Thomson Reuters expected per-share profit of 40 cents and revenue of $11.36 billion.

Shares of Sysco, which have underperformed the broader market over the past year, were down 1.8% at $34.45 in Monday afternoon trading.

Tess Stynes contributed to this article.

Write to Annie Gasparro at [e-mail]

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