It's not especially fun to watch a one-time blue chip lose its luster, but there's no point in denying that that's what's happening with Sysco (NYSE:SYY) right now. While Sysco is still the dominant food distributor in the country, that dominance seems to be worth less and less as investors see the limits of the company's ability to fight against the tide. This company will have its good days again, but I would suggest that the premium that the company has long enjoyed for its market power and stable growth should be re-evaluated.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

More of the Same in Third Quarter
Not a lot changed in Sysco's third quarter, and that's unfortunate given the recent trends in the business. Revenue rose more than 7% as reported, while "real" revenue growth was closer to 2%. Organic case volume of 2.3% was not bad, given that overall restaurant traffic was down a bit in the quarter.

Cost inflation continues to be a major factor in this story. Sysco reported 5.5% food cost inflation as part of its revenue growth, fueled in part by the double-digit price increases that companies like Tyson (NYSE:TSN) and Smithfield (NYSE:SFD) have pushed through in proteins. Other cost items like fuel and bad debt are also taking their toll, though.

Gross margin slipped a point from last year, and reported operating income fell 5%. While core expenses were up about 3% (as opposed to the nearly 5% reported increase), the company is under pressure on several fronts. Not only is the company still struggling to implement a new ERP system, but the numbers suggest that even mighty Sysco has to use aggressive pricing to protect market share.

SEE: Understanding The Income Statement

Too Many of the Wrong Customers?
Food cost inflation, ERP implementation difficulties and restaurant traffic trends are known issues. I also wonder, though, if the changing dynamics of the restaurant industry are taking their toll. Quick service restaurants (QSR) like McDonald's (NYSE:MCD), Panera (Nasdaq:PNRA) and Chipotle's (NYSE:CMG) are taking more and more share of the restaurant industry, pressuring not only locally-owned restaurants, but national chains as well.

Why would this matter? Well, Joe's Pizza is a price-taker when it comes to Sysco (outside of some ability to choose amongst other distributors), but McDonald's, Yum Brands (NYSE:YUM) and other large QSR chains have a great deal of more leverage when it comes to terms. I also wonder if the relatively more limited menus of QSRs is an issue as well - Sysco still has to maintain a large selection of product, but may be seeing more and more sales come from a narrow list of items where the margins are likely narrower.

Can Sysco Reclaim the Execution Story?
Sysco has long been a story dominated by the company's seemingly limitless ability to drive more efficiencies and synergies through aggressive cost-containment and mergers and acquisitions. Now the company seems to have run out of slack to take up.

To be fair, there are ample reasons to think that Sysco can recover and get back on its former track. This is still a very tough economy, with consumers turning to private label brands and QSR value menus to stretch their budgets. Hopefully this won't last forever. What's more, Sysco's competitors lack the same scale and synergies and can only try to fight on price for just so long.

SEE: Analyzing An Acquisition Announcement

The Bottom Line
Sysco' stock has been in a downward trend since early 2004, a trend that I believe has been fueled by valuation resets as the company's growth rate has increasingly started to match the market. These resets are painful for long-term shareholders, but companies like this often regain a growth trajectory that, while not matching the past, do provide solid long-term returns.

I'm not sure if Sysco's performance has finally shaken out the investors who believed the stock was worth a double-digit EV/EBITDA ratio, but valuation has definitely compressed. I don't think investors need to buy in today, but I think the stock is getting incrementally closer to becoming a solid long-term story once again.

SEE: 5 Must-Have Metrics For Value Investors

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center