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Sysco Corp. (NYSE:SYY) is the #1 food service supplier in North America, serving about 400,000 customers through almost 190 distribution centers in the US and Canada. Its core broadline distribution business supplies both food and non-food products to restaurants, schools, hotels, health care institutions, and other foodservice customers; its SYGMA Network operation focuses on supplying chain restaurants. SYSCO distributes both nationally-branded products, as well its own privatre label products. In addition, SYSCO provides specialty produce and meat, and supplies and equipment for the hospitalty industry.

Sometimes business can be so easy. For example, if you wonder how your customers perceive you, why they order what they do, and what they want from you, you can go out in the field and talk to them. Pretty simple, huh? Surprisingly, not many companies do this. But Sysco does.

In fiscal year 2006 (ended July 1, 2006), the company interviewed 39,000 customers. This year, it will have discussions with 40,000 more. It has almost 400,000 clients so there are plenty more to go. The company found that sales to the customers that they've talked with increase about 15% following the interviews. Sounds like the formula for success in football: block and tackle, stick to the basics, and win.

Sysco is out selling like never before. It added 151 salespeople in the first six months of this fiscal year. Plans are to have many more by the end of the year with hiring picking up in the second half. That puts more shoes on the street, contacting more customers, writing more orders. Again, sounds simple, and it's effective.

To accommodate higher demand, Sysco is building new distributions centers near old ones that are reaching full capacity. That increases efficiencies through shorter driving distances to its customers, increases speed to the customer and improves customer service. In addition to these, the company is building regional distribution centers, giant warehouses used to stock slower moving items, then delivered to centers when needed. This allows Sysco to buy in bulk, reduce inventories at the local level and reduce costs. One is almost done, another started and a third will be built on land already purchased.

Some numbers to consider: Return on Equity is a mouth watering 31% and expected to reach 35% within 5 years. Revenues are forecast to grow by 9.5% a year, on average, ove the next 5 years while earnings increase by 12% in the same time frame. Market cap is $20.6 billion. There's a decent dividend of 78 cents a share for a 2.3% yield.

Sysco reported earnings for the third quarter on April 30. Profits climbed 15% and revenues were up 5% compared to the same quarter a year ago. But those numbers missed Wall Street estimates. Short by a penny on the earnings and by $160 million in revenues. A Goldman Sachs analyst believes the stock may be in for slower growth due to what he describes as the ongoing softness in the casual dining segment.

And that's the Achilles heel for Sysco: the economy has to be doing well for people to eat out. Right now with housing prices going lower in most segments of the country and a general feeling of a slowdown (Alan Greenspan mentioned recession as a possibility in his most recent speech), people aren't dining out quite as often as they did when the economy was more robust.

There are a lot of good things going on at Sysco, especially good basic business practices. But if the economy doesn't pick up, it's going to be tougher to get more orders when its customers don't need as much food and/or equipment due to fewer diners.

The Good: Earnings continue to improve.
The Bad: Stock has been flat for several years.
The Beautiful: High Return on Equity.

SYY 1-yr chart

SYY

Disclosure: none

Source: Eye on Sysco: Good Business, Bad Economy