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Morningstar | Narrow-Moat Sysco Still Delivering Improving Sales and Profits Even Amid Competitive Challenges

Sysco is the largest domestic foodservice distributor, with double the sales of the number-two player, US Foods. Sysco marries an expansive distribution network with value-added services, ranging from marketing to sales, and cost-reduction strategies, which combine to ensure its narrow moat is unwavering. Despite Sysco’s dominance on its home turf, foodservice distribution is locally competitive, with around 15,000 domestic distributors. As such, the firm's leading share doesn’t always translate into winning in local markets.However, this fragmented market is an opportunity, given Sysco's appetite to remain a consolidator. We expect Sysco will pursue smaller rivals to extend its scale and product assortment; it has acquired close to 30 firms over the previous decade and more than 150 over a nearly 50-year period. Management anticipates acquisitions will contribute around 0.5%-1.0% to annual sales growth, which aligns with its historical record and our forecast. In our view, this strategy stands to support efforts to expand its leading share position and solidify its cost edge.Despite its vast scale, sluggish restaurant traffic and erratic changes in input costs have hindered Sysco's financial results in the past, as operating margins have barely wavered (hovering around 4% for the better part of the last six years) even with a mid-single-digit bump in annual sales growth on average over the same horizon. To withstand the pressures ensuing from the high fixed costs plaguing industry operators, Sysco is focused on driving efficiency (and is working to accelerate the realization of any savings), with a multi-year plan to increase operating income by $650 million-$700 million, which builds off the previous plan that drove over $650 million in incremental operating dollars. We think the current targets are tangible and should facilitate operating margins reaching 5% by fiscal 2024, consistent with levels seen a decade ago. Given the intensely competitive landscape, however, we expect profits will be constrained from reaching much beyond this level long term, as we surmise the firm will opt to funnel a portion of any savings realized back into the business.