Sysco Corp. reported a 7.1% jump in quarterly profit and said food costs increased for the first time in a year amid rising fruit, vegetable, dairy and meat prices, though executives with the largest U.S. foodservice company expressed trepidation over the economy.
While the food deflation of 2009 moderated this year and Sysco’s sales improved, “the broader economic climate may remain tenuous for some time,” chief executive officer Bill DeLaney said during a conference call with analysts Aug. 16, following the release of financial results. “We are in a slower-growth environment.”
Food cost inflation, or the estimated rise in Sysco’s product costs, rose 2.2% during the three months ending July 3, “driven mainly by increased prices for dairy, meat and produce,” the company said in a statement Aug. 16.
Houston-based Sysco previously reported food inflation during the quarter ended June 2009. For the three subsequent quarters, Sysco said deflation averaged 2.7%.
Deflation, or generally declining prices sustained over several months, squeezed food retailers and wholesalers in 2009 as the U.S. struggled to emerge from recession. That made it difficult for to raise prices to offset weaker demand, prompting layoffs and other cost-cutting measures.
While rising food prices may benefit Sysco, as well as produce growers, it remains to be seen whether higher costs can be fully passed along to consumers with unemployment high, analysts say. That’s raised questions over Sysco’s profit outlook, contributing to a decline in the company’s shares Aug. 16.
“Food inflation is mostly relevant to the extent that a company or industry can pass it along, or not,” Ajay Jain, an analyst with Hapoalim Securities USA, Inc., said in an e-mail Aug. 16.
“The pass-through for inflation is relatively high for the foodservice industry in general,” he said.
But Sysco cited some pricing pressure due to inflation in the previous quarter, and “it appears that inflationary pressures could have a slight dampening effect on gross margins for another couple of quarters,” Jain said.
Shares of Sysco, which has about 400,000 customers, including restaurants, schools, hotels and prisons, fell 88 cents, or 2.9%, to $29.10 in early afternoon trading Aug. 16. The stock is up 4.2% this year.
Business is starting to improve for the high-end restaurants Sysco serves and customers generally are “a little more optimistic,” DeLaney said during the call.
“But we’re not seeing a ‘step-up’ in that growth,” DeLaney said. Growth is “choppy, but it’s still positive.”