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Sysco lowers FY'20 operating income target as US customers look elsewhere

Sysco Corp. lowered its target for adjusted operating income growth Aug. 12 as clients went to other food service providers in the U.S. during the company's fiscal fourth quarter.

The Houston-based company now expects adjusted operating income to increase by $600 million between its 2018 and 2020 fiscal years, down from its previous expectation of between $650 million and $700 million. The company lost both national and regional customers in the U.S. during its 2019 fiscal year as competitors lowered prices, Chairman, President and CEO Thomas Bené said.

"When we've taken a loss, it's generally driven by competitive pricing," Bené told analysts during an Aug. 12 post-earnings call. Distribution fees have been a point of contention with customers, Bené added.

Bené did not point to specific competitors. In the U.S., Sysco's competitors include US Foods Holding Corp. and Performance Food Group Co.

Sysco's fourth-quarter adjusted EPS and net income both beat mean consensus estimates compiled by S&P Global Market Intelligence. Shares of the company were 3.5% higher at $72.48 in late morning trading Aug. 12.

But the above-estimate EPS and profit masked weaker-than-expected quarterly sales volume growth. Case growth among local clients during the fourth quarter was 1.3% on an organic basis, below the 2.5% forecast by BMO Capital Markets analyst Kelly Bania.

Sysco is facing increased competition from both other national suppliers as well as regional ones, Bené said.

"We feel comfortable with where we're at, but it is getting aggressive out there," Bené said.

Improving sales in the U.S. will be a key part of meeting even the lower adjusted operating income target, Bené told analysts. The company is also trying to turn results around within its international business, where sales declined in the fourth quarter, as well as at its Sygma segment, which sells food and other items, such as cleaning supplies, to restaurants.

The food service company's clients include chain restaurants, such as Wingstop Inc., as well as independent restaurants and government agencies, such as the U.S. Department of Veterans Affairs.