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 annie.gasparro@wsj.com
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