DBRS Confirms SYSCO at AA (low) and R-1 (middle)

DBRS has today confirmed the AA (low) and R-1 (middle) ratings of SYSCO Corporation (SYSCO or the Company) and SYSCO International, Co. (based on the guarantee from SYSCO). SYSCO maintains a strong earnings profile based on its position as the largest foodservice distributor in North America, efficient operations, and record of consistent and profitable growth. That said, SYSCO’s sales for the first 39 weeks of F2009 did not display year-over-year (yoy) growth for the first time in many years. Weak economic conditions had a negative impact on consumer spending. Top-line was flat as price increases (approximately 6%) implemented by the Company were offset by lower volume of goods sold. SYSCO raised its prices to help offset rising input costs and was successful at keeping margins stable. DBRS considers EBITDA of $1,616 million for the first 39 weeks of F2009 (vs. $1,597 million yoy) to be reasonable in the context of the current environment.

DBRS notes that the high rate of food cost inflation, which began in the fourth quarter of F2007, displayed signs of moderation during the third quarter of F2009. That said, DBRS expects that SYSCO’s operating income will remain under pressure and decrease yoy for the last quarter of F2009 and at least the first half of F2010 due to continued weakness in consumer spending. DBRS believes that SYSCO is well positioned to benefit from a recovery in F2010, but does not expect more normal sales growth (i.e., in the mid-high single-digit range) until F2011. DBRS expects SYSCO will continue to use free cash flow and some debt to finance small, tuck-in acquisitions and share repurchases. Although credit metrics have trended slightly downward recently, they remain positioned at the lower end of the current rating category. DBRS expects SYSCO’s financial profile to remain relatively stable on a through-the-cycle basis. Any large debt-financed acquisitions or an accelerated share repurchase program could pressure ratings going forward.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Food Retailers, which can be found on our website under Methodologies.

This is a Corporate rating.