Sysco Corporation (SYY) Earnings

Management highlights

- Core Business Performance * Cisco delivered total Q4 revenue of over $22 billion, growing 4.7% year-over-year, with adjusted EPS of $1.53, beating prior guidance. Full-year fiscal 2026 adjusted EPS was $4.61, above full-year guidance. * Gross profit grew 3.7% year-over-year, adjusted operating income grew 4.1% to $1.1 billion, and adjusted EBITDA grew 4.7% to $1.3 billion. Full-year free cash flow grew 16.3% to $2.1 billion, with a closing net debt leverage ratio of 2.7x. * Supply chain productivity outperformed: supply chain expenses grew slower than revenue and gross profit, on-time delivery performance increased 10 percentage points, routing efficiency reduced cost-to-serve, and the company achieved its third consecutive year of reduced miles driven and higher pieces per mile. - AI-Powered Efficiency Transformation * The company launched company-wide efficiency improvement efforts powered by AI technology modernization, which contributed to Q4 profit and EPS outperformance. * AI tools including the AI360 selling tool have improved sales colleague productivity, confidence, and retention, driving higher new customer win rates, lower customer loss rates, and stronger penetration with existing customers that outpaced industry performance. * AI is enabling more consistent execution of strategic Cisco brand pricing, and identifies conversion opportunities for sales colleagues to convert customers to lower-cost Cisco brand products, improving profitability without cannibalizing existing sales. - Restaurant Depot Acquisition Update * The company received the expected second request from the FTC during Q4, and still expects the deal to close by the third quarter of fiscal 2027. * Restaurant Depot delivered ~4% sales growth and in-line operating margins in its most recent quarter, with strong year-over-year profit growth. The acquisition is expected to accelerate profitable growth, expand exposure to the higher-margin local customer segment, increase EBITDA margins by over 140 basis points, and deliver $250 million in cost synergies from strategic procurement. * Additional growth opportunities include multi-channel fulfillment (using Restaurant Depot stores for urgent Cisco delivery orders), bidirectional assortment expansion, expanding the Restaurant Depot format to 125+ new geographies and eventually Canada, and delivering accelerating EPS accretion alongside fast debt reduction. * Cisco has committed to not raising prices at existing Restaurant Depot stores, to preserve the brand's compelling value proposition.

Guidance

- Fiscal 2027 guidance is for the standalone core Cisco business, and includes the impact of a 53rd fiscal week. Excluding the 53rd week, earnings growth is expected to be at the top end of Cisco's long-term growth algorithm. - Revenue growth is expected to be 6% to 7% year-over-year, reaching approximately $90 billion, driven by 2.5% local case growth in the USFS segment, 1.5% to 2% inflation, and ~2% growth from the extra 53rd week. Guidance assumes a macro/foot traffic environment similar to fiscal 2026. - Adjusted EPS growth is expected to be 9% to 11% year-over-year, resulting in full-year adjusted EPS of $5.02 to $5.12, with the midpoint of guidance representing 10% growth (a step up from prior years). Q1 2027 adjusted EPS is expected to be $1.18 to $1.20. - The company expects the USFS segment to deliver positive profit growth in fiscal 2027, and the international segment to deliver another year of double-digit profit growth. - The company identified $100 million of in-year net cost savings from AI-driven efficiency initiatives (inclusive of prior Q3 cost-out guidance), with a $160 million run-rate savings, and benefits will be back-half weighted in fiscal 2027. Multi-year operating margin expansion commitments will be announced later in 2024. - The board approved a 1-penny (2%) quarterly dividend increase to $0.55 per share, with approximately $1 billion in total dividend payouts planned for fiscal 2027. Share repurchases remain suspended until deleverage targets for the Restaurant Depot acquisition are met. - CapEx is expected to be ~0.8% of sales ($720 million), the adjusted effective tax rate is expected to be 23.7% to 24.2%, and adjusted interest expense is expected to be approximately $675 million. - Cisco expects to deliver double-digit total shareholder return (TSR) in fiscal 2027.

Segment performance

1. US Food Service (USFS) Segment: - Total US food service volumes grew 2.5% year-over-year, with both local and national case volumes growing 2.6% each. - Local USFS volumes grew 2.6% in Q4, with sequential improvement from 0.5% local case growth in H1 fiscal 2026 to 2.9% in H2. - National contract business saw 2.6% case volume growth, driven by growth in healthcare, travel/hospitality, and food service management, partially offset by industry-wide softness in national restaurants. - The segment grew adjusted operating income, and contributed the majority of the company's profit. Cisco brand mix in local business increased 30 basis points year-over-year to 46.4%, with value tier item sales growing four times faster than the overall business. 2. International Segment: - The segment delivered 6.7% sales growth, 7.3% gross profit growth, and 15.7% adjusted operating income growth, marking the 11th consecutive quarter of double-digit adjusted operating income growth. - Local cases grew 4.5% year-over-year, with volume growth across all international geographies. - Adjusted operating income margins have more than doubled from ~2% in 2022 to over 4% in fiscal 2026. 3. SG&A (Corporate/Other): - SGMA operating income grew 11.1% on 3.1% sales growth, driven by supply chain operational improvements. Corporate adjusted expenses fell 9.8% year-over-year due to prior cost-out efforts and lower insurance costs.

Risks & headwinds

- Elevated fuel prices created short-term margin pressure in Q4 fiscal 2026: 80% of bulk fuel purchases are hedged for fiscal 2027, but unhedged inbound transportation and food input costs were higher than the prior year, and the company absorbed a portion of this increase to keep product prices competitive. - Industry-wide softness and continued foot traffic declines in the national restaurant segment create ongoing pressure on the national contract business, partially offsetting growth in other national verticals. - The Restaurant Depot acquisition is subject to FTC regulatory review, which is ongoing, and regulatory outcomes could differ from the company's current expectations for timing or approval. - Sustained macroeconomic weakness could impact customer demand and foot traffic beyond the assumptions built into fiscal 2027 guidance. - The company's AI transformation and cost savings initiatives are in early stages, and actual long-term savings could differ from current projections.

Analyst Q&A

• Q: Which area is the largest contributor to the $100 million AI-driven cost savings target for fiscal 2027, and what is the long-term runway for these savings? /

  A: The $100 million in net savings is back-half weighted in fiscal 2027, and weighted toward the USFS segment. Key areas include AI-improved inventory forecasting that frees up working capital for faster deleveraging, AI-powered reverse auction tools that cut indirect costs for fleet and warehouse supplies, upgraded routing software that reduces miles while improving on-time delivery, AI-powered contract management that reduces profit leakage in bid contracts, and AI coding tools that improve IT efficiency. The $160 million run-rate for already identified savings will grow over time, and the full savings more than offsets the paused share repurchase program. (321 characters)

• Q: Is the current $100 million cost savings target just scratching the surface of long-term AI efficiency potential, and what are the core drivers of USFS profit growth for fiscal 2027 after a softer Q4? /

  A: AI improvements in supply chain (particularly routing) represent a significant long-term opportunity for ongoing efficiency gains, and the compounding improvements will allow Cisco to sustain guidance at the high end of its long-term growth algorithm, with potential upside if savings exceed current projections. Q4 margin weakness was driven by two one-off comparative factors: outsized strategic sourcing benefits in the year-ago quarter, and elevated unhedged inbound fuel costs, which will ease in fiscal 2027 (fuel surcharge recovery also lags by 90 days). Fiscal 2027 USFS profit growth will be driven by the $100 million in cost savings, a full year of positive Cisco brand mix expansion, continued local volume growth, and ongoing supply chain operating improvements from higher employee retention. (476 characters)

• Q: What is the current quarter-to-date cadence of US local case growth, what is national volume expected to do in fiscal 2027, and is the incomplete pass-through of inbound fuel costs intentional pricing for share? /

  A: The inbound fuel margin pressure in Q4 is not an intentional move to cut prices for share; it reflects a deliberate choice to absorb some cost to maintain competitive pricing, and this cost environment is fully incorporated into fiscal 2027 guidance. Local case growth is expected to be a steady ~2.5% for the full year, with a strong exit from Q4 and a good start to July 2026, creating consistent sequential momentum. National volume is expected to grow for full year 2027, with strong growth in healthcare, education, and food service management offsetting continued pressure from the soft national restaurant vertical. (379 characters)

• Q: What is the status of FTC review for the Restaurant Depot acquisition, and have proceedings proceeded as expected? /

  A: Regulatory review has proceeded exactly as the company expected, with the standard second request process that is normal for a transaction of this size. Cisco is confident the deal will be approved, because Restaurant Depot's cash-and-carry model and Cisco's delivery-focused business serve largely non-overlapping customer channels, and there is ample existing competition in both the cash-and-carry and delivery segments. Cisco has repeatedly committed to not raising prices at existing Restaurant Depot stores, and the deal will increase affordability by expanding the low-cost Restaurant Depot format to 125+ new geographies, which is a net positive for competition and restaurant customers. (361 characters)