Sysco Corporation (NYSE:SYY) lost more than 1% on Monday after reporting lower-than-expected quarterly earnings results as the company prepares to fight the FTC in court over its merger with U.S. Foods Inc. 
Sysco reported sales of $11.8 billion, a 4.2% rise compared to the same quarter last year but below the $12 billion Wall Street was expecting.
Excluding one-time items, SYY reported adjusted earnings of 40 cents per share, a penny below what analysts had been expecting.
Net income was down from $181 million a year ago to $177 million for the quarter when all expenses are counted.
Gross margins fell 17 basis points to 17.5% for the quarter as currency exchange and higher costs. Some of the increased costs came from payroll increases and the proposed merger with U.S. Foods while the rest was due to higher meat, dairy, and poultry prices.
SYY Plagued by Food Prices
SYY is not the only company dealing with higher food prices as just last week, Buffalo Wild Wings Inc. (NASDAQ:BWLD) reported earnings which missed expectations due to in large part a 41% increase in the cost of chicken. Most restaurant stocks have stated high chicken prices as a reason for difficulty during the quarter and because Sysco is just a middle man, the company had to eat some of the higher costs in an attempt to retain customers.
The only winners from the higher chicken prices were food producers like Tyson Foods, Inc. (NYSE:TSN). Tyson also reported earnings on Monday and increased earnings from $213 million, or 60 cents per share, to $334 million, or 75 cents per share. Food producers have all the pricing power at the moment. But, Sysco would and will argue that its proposed merger with food distributor U.S. Foods will allow the combined companies to get more favorable prices from producers.
The FTC had asked a judge to block the merger, stating it would only make SYY, currently the largest food distributor in the U.S., even larger. The merged company would have an enormous 75% of the market share. Sysco and U.S. Foods feel the combined companies can help their customers better in an industry which is fragmented and highly competitive.
Sysco and U.S. Foods are the largest national food distributors and the merger would allow them to get better prices from food producers like Tyson. However, the merged company would have an unrivaled ability to increase prices at will. A federal judge in DC is hearing both sides this week, meaning shareholders should know the outcome sooner rather than later.
If the merger does go through, Sysco stock and TSN stock will likely rise. But, if the FTC talks a judge into blocking the deal, SYY could be hit hard. Anyone buying today is taking a big gamble that probably isn’t worth taking.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
