What Sysco (SYY) Said on Its Q1 Earnings Call

Sysco NYSE: SYY reported first-quarter fiscal 2027 adjusted earnings per share of $1.19, up 3.5% from a year earlier and in line with its expectations, as volume growth and gross-margin expansion helped offset restaurant traffic pressure, food deflation and higher fuel costs.

Chair and Chief Executive Officer Kevin Hourican said the company delivered the quarterly result despite a 2% decline in restaurant traffic cited from Black Box Intelligence, elevated diesel costs and lower-than-expected food inflation. Enterprise sales increased 2.8% to $21.7 billion, while enterprise inflation was 0.3%.

“We measure our business health via profitable volume growth,” Hourican said, pointing to local case-volume growth of 2.7% during the quarter. The growth rate represented a 130-basis-point sequential improvement on a two-year stacked basis compared with the fourth quarter.

Volume Momentum Amid Traffic and Deflation Pressures

Sysco said a Cyclospora outbreak hurt restaurant traffic and operator volume during August, though the company experienced stronger volume performance in July and September. Hourican said the reported 2.7% local case growth included the impact of the outbreak.

The company’s U.S. Foodservice local volume growth exceeded its guidance range, while total U.S. Foodservice volume rose 2.6%. Acquisitions contributed 0.4% to local volume growth in the quarter, according to management.

Sysco maintained its fiscal 2027 outlook for approximately 2.5% U.S. Foodservice local case-volume growth. Management said it expects sales-force retention and tenure, the AI360 sales tool, Sysco Brand penetration and a greater focus on opening new customer accounts to support that target as comparisons become more difficult later in the year.

Hourican said October began somewhat softly for the industry but improved during the third and fourth weeks of the month, with November also off to a good start.

Food deflation was more pronounced than the company had anticipated, particularly in dairy and poultry. U.S. broadline operations experienced approximately 0.3% deflation, while enterprise inflation was 0.3%. Sysco now expects inflation of less than 1% in the second quarter and approximately 1% to 1.5% for the full fiscal year, compared with its earlier planning assumption of roughly 1.5% to 2%.

Management attributed dairy deflation to comparisons with avian-influenza-driven inflation a year earlier as well as milk oversupply. Poultry prices were also deflationary due partly to comparisons with prior-year avian influenza impacts. The company said it had begun to see positive inflation in October as it started lapping those prior-year conditions.

Margins Expanded as Sysco Brand Mix Improved

First-quarter gross profit increased 3.8% to $4.1 billion, and gross margin expanded 18 basis points to 18.6%. The company cited local volume growth, customer fuel surcharges, greater Sysco Brand penetration, strategic sourcing savings and tariff benefits as contributors.

Hourican said Sysco Brand mix in local business increased 44 basis points year over year, while total U.S. Broadline Sysco Brand mix turned positive for the first time in several quarters. He said the company’s expanded value-tier assortment and sales teams’ “Swap and Save” activity were supporting adoption among local street customers.

Adjusted operating expenses rose 4% to $3.1 billion, or 14.4% of sales. Chief Financial Officer Brandon Sewell said the increase reflected planned growth investments and higher fuel costs, while corporate adjusted expenses rose 4.8%, primarily due to insurance and benefits expenses.

Sewell characterized insurance and benefit expenses as transitory and said productivity gains from employee retention helped contain costs. He also said fuel’s net effect on operating income was relatively small because of hedging and customer surcharges. Sysco said it has hedged approximately 80% of its bulk fuel purchases over the next fiscal year.

International sales rose 5.1%, while adjusted operating income in the segment increased 12.2%, marking the business’s 12th consecutive quarter of double-digit adjusted profit growth. International local cases grew more than 3% in every region, management said. SYGMA sales increased 1%, though operating income declined.

AI Transformation and Jetro Restaurant Depot Plans

Sysco reiterated that its AI- and technology-powered transformation program is expected to generate $100 million of net cost savings in fiscal 2027 and $500 million by the end of fiscal 2029. The program includes 30 initiatives, with four accounting for about 70% of expected value.

The company said benefits will be weighted toward the second half of fiscal 2027. Its routing initiative, now live in pilot regions, has produced a 2% to 4% improvement in pieces per mile driven and better on-time delivery-window compliance. Sysco plans to deploy the first phase across all U.S. operating locations during the year.

Hourican said every 1% improvement in pieces per mile could produce about $3 million in efficiency gains once scaled beyond the pilot. A second, AI-infused routing phase is expected to begin in the second half of fiscal 2027 and continue through fiscal 2028.

The company also completed its first AI-powered request-for-proposal process in indirect sourcing, which management said exceeded its procurement savings target by about 30%. Separately, Sysco said its AI360 sales tool is helping sales consultants identify customer opportunities, including potential Sysco Brand conversions.

On the pending Jetro Restaurant Depot acquisition, Sysco said both parties have substantially completed responses to the Federal Trade Commission’s second request and that it remains on track to close the transaction by the end of Sysco’s fiscal third quarter.

Restaurant Depot reported 1% volume growth in its most recently completed quarter despite 1.6% product deflation, according to Sysco. Management said Restaurant Depot also delivered year-over-year operating-profit and EBITDA increases, both in dollars and as margins.

Sysco completed financing for the cash portion of the transaction, raising $11.75 billion in senior notes, $5 billion in hybrid debt and $1 billion in equity. Together with $3.75 billion in committed term loans and about $200 million in commercial paper, the financing produced an effective debt cost of 5.8%, including more than $300 million of interest-rate hedging proceeds.

Sewell said issuing the financing when Sysco did is expected to avoid approximately $50 million in incremental annual interest expense that could have resulted from raising the funds one week later.

Fiscal 2027 Outlook Maintained

Sysco reaffirmed its outlook for fiscal 2027 adjusted EPS growth of 9% to 11%, centered on approximately 10% growth. The outlook reflects standalone Sysco and includes a 53rd week in the fiscal year.

• Reported net sales growth is now expected at the lower end of the company’s prior 6% to 7% range because of lower inflation.
• Inflation is expected to be approximately 1% to 1.5% for the year.
• Adjusted depreciation and amortization is projected at about $850 million.
• Interest expense is expected to be $680 million, with other expense of $20 million.
• Sysco expects to return about $1 billion to shareholders through dividends.

Management said adjusted EPS growth should improve in the second quarter and accelerate further in the third and fourth quarters as strategic sourcing and transformation savings build. Sysco also announced that Sewell, who had served as interim CFO, was appointed the company’s permanent chief financial officer.

About Sysco (NYSE:SYY)

Sysco Corporation is a global foodservice distribution company headquartered in Houston, Texas. It supplies food and related products to restaurants, healthcare and educational institutions, hotels, government facilities, and other foodservice operators.

The company distributes a broad range of products, including fresh and frozen foods, meat and seafood, produce, dairy products, canned and packaged goods, beverages, and specialty food items. Sysco also provides nonfood products such as kitchen and dining supplies, equipment, and cleaning products, along with services intended to help customers manage menus, procurement, and operations.

Founded in 1969, Sysco serves customers primarily across the United States and Canada, as well as in parts of Europe and other international markets.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.