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Sysco Reports Sales Increase of 9.4% in 3Q; Earnings Drop

Sysco revealed that diluted earnings per share were 30 cents compared with 34 cents in last year's third quarter and EPS results included a net expense of 4 cents for incremental share-based compensation, principally related to stock options, which was not required to be expensed in fiscal 2005.

Company executives continued to note the effect of fuel-cost increase pressures on performance.

Among other highlights of fiscal 2006, the leading distributorship cited the following:

  • Sales increased 8.2% to $24.1 billion from $22.3 billion in the same period last year.

  • Net earnings (after the cumulative effect of an accounting change recorded during SYSCO's first fiscal quarter of 2006) were $601.2 million compared to $676.8 million in the same period last year.

  • Diluted earnings per share (after the cumulative effect of an accounting change recorded during SYSCO's first fiscal quarter of 2006) were 95 cents compared with $1.04 in last year's first 39 weeks.

  • EPS results for the first 39 weeks of fiscal 2006 includes a net expense of 13 cents for incremental share-based compensation, principally related to stock options, which was not required to be expensed in fiscal 2005.

    Richard J. Schnieders, SYSCO's chairman, ceo and president, commented, "We continued to build on the top line momentum from our second quarter and the result was a solid 9.4% sales gain. The overall sales growth was aided by our Business Review efforts, which touched approximately 10,700 customers during the quarter, as well as rapid sales growth at our specialty companies. The top-line sales strength also continued into the fourth fiscal quarter, which began with record sales of $676.1 million for the week ended April 8. That was our first record sales week not related to Mother's Day since April 2004."

    Schnieders added that during the third quarter the company continued to experience expense pressures, most notably fuel and share-based compensation expenses. In addition, during last year's third quarter Sysco benefited from the reversal of an $11 million accrual for an income tax contingency, making this year's third quarter comparison even more difficult.

    "Throughout the past 39 weeks our operating companies have done a terrific job in the face of challenging expense pressures," Schnieders continued. "We expect our fourth quarter will also contain similar headwinds. After that, however, those pressures should lessen, if not disappear, as we anniversary the many added expense items we've encountered this year. By remaining focused on our proven and successful strategies to drive sales growth, market share gains and earnings, SYSCO is positioned for strong and sustainable growth."

    In its report, Sysco underlined the benefits of its Business review process as it continued to generate at least mid-teens percentage sales increases in regions of the country. The company headquarters said its operating companies continued adding to its staff of customer contact professions during the quarter and, fiscal year-to-date have increased staffing by about 5%.

    Gross profit margins decreased 2 basis points in the third quarter to 18.87%, Sysco reported, compared with 18.89% in last year's third quarter. Sales to Sysco's core business of independent restaurants were 52.9% of U.S. broadline sales in the quarter versus 52.7% last year.

    Sysco said operating expenses as a percent to sales were 14.66% during the third quarter compared with 14.15% in the same quarter a year ago. Expense items in the third quarter that were in excess of last year's third quarter expenses included fuel costs and pension expense, which increased $10.5 million and $5.9 million, respectively. Incremental share-based compensation expense of $26.1 million was also included in this year's third quarter, but was not required nor included in the results from last year's third quarter. In addition, costs for the National Supply Chain project, net of benefits, were $11.2 million in the third quarter of fiscal 2006.

    Capital expenditures during the quarter were $131.6 million. Through the first 39 weeks of fiscal 2006, capital expenditures were $364.4 million. The company continues to project capital expenditures to be in a range of $425 million to $450 million for fiscal 2006.

    Sysco's Northeast Redistribution Center (RDC) began receiving new items from existing suppliers during the quarter. During the fourth quarter the products from additional suppliers will be transitioned into the facility and case volumes will continue to modestly increase. A majority of projected weekly case volume will flow through the facility by the end of the fourth fiscal quarter.

    In February the company announced the purchase of land for construction of a third RDC in Hamlet, Indiana. That facility is expected to be operational approximately 18 months after construction commences.

    Construction of a Raleigh, NC, fold-out operation continues to progress according to plan and is expected to be operational by the end of fiscal 2006. In March the company also announced that it plans to open a broadline fold-out operation in Knoxville, TN, which is expected to begin shipping product approximately 18 months after construction commences.

    In February, Sysco acquired Desert Meats, the largest independent specialty meat supplier in Las Vegas, NV, with calendar year 2005 sales of approximately $55 million.

    Sysco's FreshPoint subsidiary completed acquisitions of City Produce and Thomas Brothers Produce during the third quarter. City Produce operates from four Texas locations and Thomas Brothers Produce supplies customers from two Oklahoma facilities and an operation in Arkansas, further expanding the scope of SYSCO's specialty produce operations.

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