Activist investing and special situations for the retail side.

People Won't Stop Eating, They Can't

Added on by Lee Ho Fook.
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Be sure to check out our detailed stock analysis (click here).  People won't stop eating. It's that simple. That's part of what makes McDonald's such a great investment. However, I like to look to lesser known names to find value. Sysco  (NYSE: SYY) is one of those names.

The company is one of the largest distributors of food products for the food-away-from-home industry. As the economy rebounds, so too should the dining-out market, a positive for Sysco. The company has some 185 distribution facilities and serves 400,000 customers. Around 100% of its sales are from North America, with 90% in the U.S. and 10% Canada. 

Sysco has a solid mix of products sold, with no single category making up more than 20% of revenue. For 2012, canned/dry products made up 19% of revenue, fresh/frozen meats 19%, frozen fruit/veggies 14%, dairy 10%, poultry 10%, etc. 

So who does Sysco sell its products to? Anybody and everyone. About 60% of its products go to restaurants, but no single customer accounts for more than 10% of sales. I believe the return of consumers to the casual-dining space will be a big positive for Sysco in the near future. 

Given its size, scale and competitive advantages, the majority of the restaurant industry relies on Sysco. The food distributor also serves the the military, with notable contracts from the Pentagon. The other nice thing about Sysco is that it pays a dividend yield of 3.2%. 

Dining out

Let's look at a couple of top casual-dining companies to see how the market is shaping up and if we should expect this industry to impress us anytime this year. Darden Restaurants (NYSE:DRI) operates the Red Lobster, Olive Garden, Bahama Breeze, Seasons 52, LongHorn Steakhouse and Capital Grille chains.

Darden expects sales to be up nearly 7% in fiscal 2014, as the company ups its number of restaurants. In 2014, the restaurant hopes to open 80 new units. It is focusing on its staple Red Lobster and Olive Garden brands, and will be offering more promotions and new menu items.

Also, the company has what it calls the specialty restaurant group, which caters to higher-income guests. Darden has added Eddie V's and Yard House to this group. The specialty segment's contribution to overall sales has grown 5% since the Eddie V and Yard House acquisitions.

Darden also plans on remodeling 430 Olive Garden stores in the U.S. by the end of 2015, changing the decor to look more like farmhouses in Tuscany, Italy. 

Another key operator is The Cheesecake Factory  (NASDAQ: CAKE), which operates 175 The Cheesecake Factory, Grand Lux Cafe and RockSugar Pan Asian Kitchen restaurants. Cheesecake has been serving the "upscale" casual- restaurant market for some 40 years. 

Sales for Cheesecake are expected to be up 4% in 2013, driven in part by the expected 1.2% increase in average menu-item prices. The company is also making the move into Mexico, Chile and four other Latin American countries -- Argentina, Brazil, Colombia and Peru -- by 2021. Cheesecake plans to open the first of these restaurants in Mexico City in early fiscal 2014. One of the company's other big initiatives is to open smaller stores to cater to specific markets. 

In late July, Cheesecake posted 2Q EPS $0.54, compared to $0.51 for the same period last year. At the same time, the company decided to boost its shareholder- reward program:  boosting its dividend payment 17% and upping its share- repurchase program by 18%. I take Cheesecake's recent initiative to return more capital to shareholders as indicative of a strengthening casual-dining market. 

Bottom line

The beauty of Sysco? Everyone has to eat. Sysco is a broad bet that this trend won't change anytime soon. And what's more, it's a bet on the rebounding economy and the return of the dining-out market. The solid performance that various restaurants, including Darden and Cheesecake, are showing, suggests that the dining-out market is performing well.