Synopsis

Sysco (NYSE:SYY) specialises in the distribution of food and related products. It supplies mainly to the foodservice or food-away-from-home industry and is also considered the largest distributor globally. SYY's past financial results have demonstrated robust top-line growth. In addition, its profit margins have expanded as well. For its most recent 3Q24, it reported net sales growth of 2.7% year-over-year, and margins remained robust. SYY's total addressable market has consistently grown since 2000, and we expect this trend to continue in 2024. Furthermore, food-away-from-home has also been consistently gaining market share from food at home. Despite higher prices, most Americans reported that they would still continue to dine out. Given the positive outlook, I am recommending a buy rating for SYY.

Historical Financial Analysis

Over the last three years, SYY has demonstrated robust top-line growth. In 2022, its sales increased from 2021's $51.3 billion to $68.6 billion. This represents a year-over-year growth of 33.8%. The main driver of this growth was volume growth. Local case volume improved by 10.3%, while total case volume in its US broadline operations increased by 15.4%. During the challenging supply chain period, SYY provided support to its customers by converting its supply chain to a six-day work week. As a result, this initiative allowed SYY to gain market share.

In 2023, SYY continued to report sales growth, which increased to $76.3 billion. Similar to 2022, this growth was attributed to volume growth. SYY's US foodservice case volume improved 5.2%, while local case volume improved 3.3%.

Apart from volume, product cost inflation is also a driver of SYY's sales. In 2022, SYY experienced inflation in its US broadline operation at a rate of 15%. For 2023, it was reduced to 6.1%. For 2024, SYY is forecasting the inflation rate to be below historical trends.

Moving onto margins, all three margins were robust year-over-year. In 2023, its gross profit margin expanded to 18.28%. The gross profit margin expansion was driven by higher volumes and SYY's effective inflation management. In addition, 2023's operating expense as a percentage of sales fell from 14.53% to 14.30%.

As a result of gross margin expansion and decreasing operating expense as a percentage of sales, SYY's 2023 operating income margin expanded from 3.42% to 3.98%. Its net income margin expanded from 1.98% to 2.32%. Apart from gross margin expansion and decreasing operating expense as a percentage of sales, SYY's 2023 interest expense as a percentage of sales fell from 0.91% to 0.69%. This improvement also bolstered its net income margin.

Third Quarter 2024 Earnings Analysis

For its most recent 3Q24 results, SYY reported sales of $19.4 billion, which represents year-over-year growth of 2.7%. Its US foodservice operation segment grew 3.4% to $13.7 billion, driven by inflation and volume growth. Total case volume was up 2.9% for the quarter.

For its international foodservice operations segment, sales were up 4.5% to $3.5 billion. This growth was driven by inflation, foreign currency translation, and volume growth. Volume grew because of its Recipe for Growth initiatives. For SYGMA segments, sales were down 3.5% year-over-year due to negative traffic trends across the industry.

However, do note that SYGMA only accounts for approximately 10% of SYY's sales. Therefore, this impact is not as significant as compared to its US foodservice operations and international foodservice operations segments.

Regarding profitability margins, all three remained robust year-over-year. Its gross profit margin expanded modestly from 18.20% to 18.60%. This expansion was attributed to SYY's effective and successful management of inflation.

However, operating expense as a percentage of sales increased by 0.4%, which fully offset the gross profit margin expansion. The increase in operating expense was due to higher volume as well as costs related to severances, transformation projects, and acquisitions. As a result, SYY's operating income margin remained flat year-over-year at 3.70%. SYY's net income margin for the quarter was 2.20% vs. the previous period's 2.30%. On an adjusted basis, its adjusted operating income margin expanded from 3.90% to 4.12%. Its adjusted net income margin expanded from 2.44% to 2.49%.

Business Overview

The two charts above illustrate SYY's sales by segments and sales by customer type. For sales by segment, it is clear that US foodservice operations form the largest share of SYY's sales, accounting for 70%. Coming in second is its international foodservice operation, which accounts for 19%. SYGMA, which is SYY's customised distribution operations in the US catering to quick-service chain restaurant locations, accounts for 10%.

By customer type, restaurants form the largest share of SYY's sales, as they account for 62%. Travel and leisure, education and government, and healthcare weights are similar, at approximately 8%. From these statistics, it is clear that the US foodservice and restaurant industry's outlook plays an important and crucial role in SYY's outlook.

The US Foodservice Industry

Looking at the above chart, SYY's total addressable market [TAM] has been consistently growing since 2000. The compound annual growth rate [CAGR] between 2000 and 2023 is approximately 3.5%. Additionally, after the COVID-19 pandemic, the addressable market has shown a strong recovery. In 2023, the industry is valued at $360 billion, compared to 2020s $231 billion.

The outlook of the US foodservice industry will have an impact on SYY's outlook because SYY is the largest global distributor of food and related products, primarily to the foodservice or food-away-from-home industry.

According to Technomic, it is forecast that high prices and declining consumer confidence are expected to negatively affect consumer spending in 2024. Over the last few years, this industry has experienced dramatic fluctuations caused by the pandemic. It is expected that the post-pandemic recovery will stabilise in 2024, and a majority of restaurant segments are anticipated to return to low single-digit growth rates, similar to those rates seen pre-COVID.

Although the outlook for this industry is expected to stabilise, it is not yet negative as the market is still expecting growth in 2024, albeit at a modest or normalised rate. Therefore, the outlook is still positive, and this is anticipated to support SYY's outlook as well.

Food Away From Home

Being the largest global distributor of food and related products primarily to the foodservice or food-away-from-home industry, it is crucial that we take a deeper look at food-away-from-home's [FAFH] market share against food-at-home [FAH].

The above chart shows the market share between grocery stores and food services and drinking places. Grocery stores represent FAH, while food services and drinking places represent FAFH.

Since 2001, FAFH's market share has been consistently increasing, implying that FAFH has been gradually taking market share away from FAH. Over those 23 years, FAFH only lost market share to FAH for three years, which was during the pandemic. Given the consistent and long-term gain in market share from FAH, SYY believes this to be a macrotrend, and FAFH's trend is expected to continue for the long term.

Robust Dining Out Expenditure

According to Lightspeed Commerce, 39% of Americans report eating out at least once a week, and 81% say they do so at least once a month. Despite rising prices, consumers are not giving up on their dining-out lifestyle. Instead, consumers are focusing on how to better manage their bills rather than cut down on dining out.

Despite rising prices, approximately half of the participants in the Lightspeed survey indicated that they would continue to dine out. Experts believe this is driven by post-pandemic behaviours similar to revenge travel and revenge shopping. They believe that consumers just want to live life to the fullest and enjoy it due to the uncertainty about the future.

These data suggest that dining out is still strong, and looking ahead, it is expected to remain strong as Americans continue to be willing to dine out despite high prices. This positive outlook will support growth in the foodservice industry. As a result, this benefit will also trickle down to SYY, which will bolster its growth outlook as well.

Relative Valuation Model

For context, SYY operates in the food distribution industry. SYY specialises in the distribution of food and related items to the foodservice industry. In my relative valuation model, I will be comparing SYY against its peers in terms of growth outlook and profitability margins trailing twelve months [TTM].

For growth, I will be comparing their forward revenue growth rate, as it is considered to be a forward-looking metric. For profitability margins, I will be comparing their gross profit margin TTM, EBITDA margin TTM, and net income margin TTM. These margins will give us a good gauge of their core business activities strength and performance.

Firstly, regarding the growth outlook, SYY outperformed its peers. SYY has a forward revenue growth rate of 6.24%, which is higher than peers' median of 5.29%. This represents 1.18x over the peers' median. Among its peers, SYY has the third-highest forward revenue growth rate.

Moving onto profitability margins TTM, SYY outperformed in all three metrics. Firstly, SYY's gross profit margin TTM outperformed its peers. SYY's gross profit margin TTM of 18.53% is higher than peers' median of 16.84%. Secondly, SYY's EBITDA margin TTM of 4.85% is also higher than peers' median of 3.98%. Lastly, SYY's net income margin TTM of 2.66% also outperformed peers' median of 0.98%.

Currently, SYY's forward non-GAAP P/E ratio is 16.44x, slightly lower than peers' median of 17.02x. Given SYY's outperformance in both growth outlook and profitability margin TTM, I argue that SYY should be at least trading at peers' median forward non-GAAP P/E ratio. Therefore, I will be adjusting my target 2025 P/E for SYY upward to 17.02x.

For 2024, the market revenue estimate for SYY is $78.86 billion, while EPS is $4.29. For 2025, the market revenue estimate is $82.31 billion, while EPS is $4.62. Deep in the earnings call transcript, management did provide their outlook for FY2024. Firstly, for sales, SYY forecasts approximately $79 billion. For adjusted EPS, it is reiterated at $4.20 to $4.40, which implies 7% year-over-year growth at the midpoint.

Based on management's guidance as well as my forward-looking analysis as discussed, they support the market's estimates. Therefore, by applying my target 2025 P/E to SYY's 2025 EPS estimate, my 2025 target share price is $78.63.

Risk and Conclusion

The risk associated with SYY is with respect to inflation or deflation. In the industry SYY operates in, which is the foodservice distribution industry, it generally has low margins and high inventory turnover. Therefore, fluctuating food costs have an impact on SYY's financial performance. During deflationary periods, SYY's financial performance will be impacted because a substantial portion of its sales are based on the cost of products plus a percentage margin, mark up, or fee per case. On the other hand, if inflation were to rise significantly or sharply, it might hurt SYY if it is unable to pass down costs or if consumers cut down on their discretionary spending.

SYY's historical results have shown consistent sales growth. Additionally, its profit margins have been expanding as well. For its most recent 3Q24 results, SYY continues to report sales growth while maintaining robust margins year-over-year. Since 2000, SYY's TAM has been consistently growing. 2020 recorded a year-over-year decline due to the impact of COVID-19, but it quickly recovered after that. Looking ahead, Technomic is forecasting growth for 2024, but at a normalised rate.

In addition, the FAFH market has been consistently gaining market share from FAH over the last 23 years, except for the COVID pandemic period. Given the length and consistency, SYY believes this to be a macrotrend, and it is anticipated to continue for the long term. This trend is also supported by the robust dining-out spending trend, as Americans stated that they would continue to dine out despite higher prices. On these positive notes, I am recommending a buy rating for SYY.