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 annie.gasparro@wsj.com
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