SYY Sysco Corp

By Heather Haddon 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 6, 2018).

Sysco Co.'s shares tumbled Monday after the world's largest food-service distributor said it is struggling against labor, transportation and other costs that are pressuring many U.S. companies.

The Houston-based distributor to restaurants and other food-service outlets reported weaker-than-expected profit and sales for the company's first quarter as costs eroded margins. Adjusted earnings per share were 91 cents on sales of $15.2 billion. Both figures fell below expectations.

"We continue to see significant cost challenges," Chief Executive Tom Bené said on a call with investors.

Shares in the company were off 9.5% on Monday afternoon, the largest one-day percentage slump since 2010, according to FactSet.

Sysco's report sent a chill across food-distributor stocks Monday. US Foods Holding Corp. was down 3.5%, Performance Food Group Co. was off 2.7% and SpartanNash Co. was down 1.9%. Sysco is the first of several food distributors to report financial results this week.

Food distributors are being hit hard by a number of challenges facing the broader U.S. economy.

The tight labor market has made recruiting warehouse and transportation workers a struggle. The labor shortage is now damaging the food distributors' earnings as well. Sysco's overtime expenses rose in the company's quarter ended in September. The cost of hiring and drivers and retaining warehouse workers hurt profit, executives said.

"We are having to struggle to get as many people where we need them, when we need them there," Chief Financial Officer Joel Grade told investors.

Transportation costs are also growing as a result of higher fuel prices and and new reporting requirements on the hours that truck drivers log. Those expenses are expected to grow as the U.S. holiday season arrives, fueling consumer spending that is driving a surge in demand for shipping capacity from e-commerce companies.

Sysco, which distributes around the world and has a large U.K. business, also said it was hurt by tariff costs and an expected damping of the British economy caused by the U.K.'s planned exit from the European Union.

The food distributor is raising prices in response to the cost increase, as are many companies facing rising input costs. But the distributor said costs rose higher than its price increases in some areas during the quarter. Executives said further price changes could take place as contracts with customers renew.

Restaurants could resist additional price increases because the competition between distributors is fierce and some customers could switch to cooking at home if restaurant prices climb too high, RBC Capital Markets said in a note to investors.

Sysco said its profit rose 17% in the latest quarter to $431 million, or 81 cents a share, compared with the same period last year. Sales in the company's domestic food-service operations rose 5.6%, while its international sales increased 0.6%.

Write to Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

November 06, 2018 02:47 ET (07:47 GMT)

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