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Have the Three Major Foodservice Distributors Turned the COVID-19 Corner?

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When it comes to foodservice distributors’ results, the U.S. looks to the big three, and Sysco Foods (SYY), Performance Food Group (PFGC) and US Foods (USFD) all reported quarterly earnings this past week. There is optimism in the air.

However, U.S. service industries, including dining, expanded in October at the slowest pace in five months as orders and employment cooled, according to data from The Institute for Supply Management’s (ISM) services index. Still, 16 of 18 service industries reported growth in October, with foodservice among the leaders, reported Bloomberg. Full Story (Nov. 5).

The ISM data is a bit reassuring for this group, but let’s also take a deeper look into these three big foodservice distributors and what their quarterly results reflect.

Sysco Corp

The first of three foodservice distributors we will focus on is Sysco (with a market capitalization of nearly $31 billion), which reported Q1 adjusted earnings of $0.34 which fell from a year ago, but was above the FactSet consensus of 25 cents, while sales of $11.78 billion came in just above the FactSet consensus of $11.73 billion.

President and Chief Executive Officer Kevin Hourican said: “We are pleased with these financial results in light of the significant constraints that are being placed upon our customers due to the COVID-19 pandemic.” Sysco believes it’s doing more than anyone in the food service distribution industry to ensure the success of the restaurants and customers that it serves.

Examples of Sysco’s management of the crisis during Q1 is evidenced by the fact that the company has more than $8 billion of cash and available liquidity, which should ensure financial flexibility in this difficult operating environment.

Sysco believes that it is leading the industry with the work they are doing to help its restaurant customers succeed by delivering holiday toolkits for restaurant tours, creating marketplace pop-up shops, and providing solutions to extend the outdoor dining season.

The company is increasing its efforts across its customer facing tools and technology, including improving its digital order entry platform Sysco Shop. By the end of the first quarter, the percentage of orders being placed through Sysco Shop increased to approximately 60%.

“We’re winning share at the national level through the $1.3 billion worth of national sales wins (mostly in QSR) that we have posted since the beginning of COVID and net new $300 million since last quarter,” noted Hourican.

Performance Food Group

The next of the foodservice distributors to focus on is Performance Food Group, which reported Q1 adjusted earnings per share of $0.25 on a net sales increase of nearly 13% to $7.0 billion.

CEO George Holm noted: “Our first quarter results came in ahead of our expectations as the business recovery remains on track and we continue to outpace the foodservice industry. We continue to win new business particularly in the independent restaurant channel, which resulted in year-over-year gross margin expansion during the quarter.”

The company reported that the acquisition of Reinhart Foodservice (which it inked a deal to acquire in July 2019) has exceeded its expectations and proven to be a strong cultural and operational fit with Performance Foods’ Legacy Performance Foodservice business.

Jim Hope, CFO of Performance Foods said that “while COVID-19 continues to impact our customers and industry, we have seen a continual sequential improvement in our business.”

He noted that total case volume increased 8.9% in Q1 compared to  a year ago (driven by the Reinhart acquisition), while independent cases were up 28% in the quarter.

The company’s Foodservice segment’s net sales grew 28.1% to $5 billion driven by the acquisition of Reinhart. Foodservice EBITDA increased 50.2% to $156.2 million.

Hope added: “I’m really pleased with the investment we made in the Salesforce and how it’s paid off and the Reinhart integration and performance is doing exceptionally well, the Eby integration and performance is going exceptionally well.”

Wells Fargo is also bullish on Performance Food Group following its quarterly call as they believe the company is investing for future growth.

“It continues to invest in capacity and new lines of business, and will look to take advantage of M&A opportunities in the intermediate term. Overall, we view PFGC’s update as positive as it continues to support our view that profitability post-COVID should be the same or better than pre-pandemic levels.”

Wells Fargo keeps an overweight rating in place for the company and a price target of $45.

US Foods

Rounding out the top big three foodservice distributors is US Foods Holding Corp. (USFD) which, on Nov. 2, reported Q3 adjusted earnings of $0.15 on net sales of $5.8 billion.

“In the third quarter, we demonstrated the resiliency of our business model by continuing to gain market share in an industry significantly impacted by COVID-19,” said Chairman and CEO Pietro Satriano.

He noted that the third quarter saw a marked improvement in their business, as case volumes have steadily improved, and the company is profitably gaining market share.

Satriano noted that organic restaurant case volume for the week ending October 24th was down just under 10% compared to prior year, which was remarkable given that we were down almost 60% at the beginning of the pandemic.

He added that recent acquisitions of Food Group and Smart Foodservice have performed in line with expectations and the integration of its Food Group is on track.

“One of the drivers of this recovery has been off-premise dining, which continues to grow in importance. As we said on our last call, for full-service restaurants, 55% of traffic in June was off-premise compared to 19% pre-COVID. A more recent survey state that 68% of consumers in this country are a takeout at least once a month post-COVID compared to 45% pre-COVID, an increase of 51%,” noted Satriano. “The continued growth in off-premise dining also gives us the confidence that restaurants in the colder climates will be able to navigate the winter months.”

One of the many advantages US Foods believes it has in its arsenal is its growing portfolio of innovative products. In September, the company launched Fall Scoop, which is focused on off-premise dining. The launch featured new items such as tamper-evident containers, cleaning and sanitizing products and individually packaged ingredients that allow restaurants to create home meal kits.

Importantly, Satriano said the company is on pace to on-board a total of over $800 million of new business by the end of this calendar year, which includes new wins in the healthcare arena, demonstrating the strength of the company’s new business pipeline across the multiple different customer types.

“As evidenced by the continued appetite of consumers to eat out and take out, as well as the continued ingenuity of restaurants across the country, we remain confident that our industry will return to pre-COVID levels over time,” stated Satriano.