1 Food Stock to Avoid No Matter What

Sysco (SYY 1.02%) distributes food to a variety of places. Unfortunately, it has the misfortune of relying on restaurants for 62% of its annual revenue. While other areas it sells to like healthcare, education, or government are likely to bounce back quickly, a large portion of its business will undoubtedly face ongoing pressure, as COVID-19 cases are on the rise.

The combination of limited seating capacity, the potential for governments to shut down restaurants again, and a slow economy means Sysco is in for a rough time. While you could wait this out, there’s more going on with the company that makes it difficult to consider investing in.

Image source: Getty Images.

Challenges heading into the pandemic

Sales had been sluggish even before the pandemic struck this year. For instance, for the first half of fiscal 2020, which ended on Dec. 28, sales only rose about 1% to $30.3 billion. Due to cost-cutting efforts, its adjusted operating income increased nearly 6% to $1.4 billion.

Of course, the back half of its fiscal year was brutal, causing full-year sales to fall by 12% to $52.9 billion and adjusted operating income to drop by more than 37% to $1.7 billion.

Understandably, management had to abandon its three-year goals set in fiscal 2018 that it planned to achieve by this year ($600 million of adjusted operating income growth after accounting for the sale of a business, growing earnings per share faster than operating income, and achieving a 16% return on invested capital).

Its more modest near-term focus is to boost liquidity, remove costs, and seek additional sources of revenue from its restaurant customers during the pandemic.

However, after embarking on expense reductions for some time, there are limits to how much Sysco can continue cutting expenses. At some point, it will have to grow revenue, which was challenging even before the coronavirus struck.

Trying to pivot

To management’s credit, it is also trying to shift the business to serve other channels such as groceries and supermarkets. However, these are not easy to break into since these companies, particularly large ones like Kroger, already have a strong distribution network. It may have an opportunity with regional grocers, but it will likely take time to build relationships.

Management has stated new business initiatives have brought in $1 billion in revenue over the last six months. But for a company with about $53 billion in annual sales last year, it has a long way to go before this becomes a significant part of Sysco’s business.

Given the prior sluggish sales growth and the new challenges it faces from COVID-19, you should find your meal ticket elsewhere. This is a food company that is confronting too much uncertainty.