Company Reports

With Scott McPherson succeeding 17-year CEO George Holm, Performance Food Group enters its next chapter under a leader who previously ran Core-Mark’s convenience business and later served as PFG’s COO. Although acquisitions should remain part of the strategy, the firm’s recent deal activity—building out convenience distribution while adding scale in foodservice—should place greater emphasis on integration and realizing the benefits of its scaled footprint. We expect this will manifest in greater investment in customer-facing technology, internal technology standardization, and equipment upgrades, even as PFG scours the business for procurement opportunities. As a result, we forecast capital expenditures at 0.7% of sales over the next five years, above the prior five-year average of 0.6%. We think these priorities are sensible steps toward unifying PFG’s disparate operating model, but we remain skeptical that the initiatives will translate into a durable edge, given the structural differences across segments and the highly competitive landscape in which the company operates.

With Scott McPherson succeeding 17-year CEO George Holm, Performance Food Group enters its next chapter under a leader who previously ran Core-Mark’s convenience business and later served as PFG’s COO. Although acquisitions should remain part of the strategy, the firm’s recent deal activity—building out convenience distribution while adding scale in foodservice—should place greater emphasis on integration and realizing the benefits of its scaled footprint. We expect this will manifest in greater investment in customer-facing technology, internal technology standardization, and equipment upgrades, even as PFG scours the business for procurement opportunities. As a result, we forecast capital expenditures at 0.7% of sales over the next five years, above the prior five-year average of 0.6%. We think these priorities are sensible steps toward unifying PFG’s disparate operating model, but we remain skeptical that the initiatives will translate into a durable edge, given the structural differences across segments and the highly competitive landscape in which the company operates.

Performance Food's fourth-quarter sales rose 6.5%, driven by 5.8% growth in independent foodservice volume. Adjusted EBITDA margin expanded 10 basis points to 3.3% on favorable insurance costs, despite a 10-basis-point consolidated segment-level margin dip to 3.5% due to higher costs.

Performance Food Group's expanded salesforce and tech investments have helped drive 5.6% organic independent case growth over the last three years, topping the industry's 1.4%. Management aims to use technology to enhance processes and integrate its disparate operations to buoy profit growth.

With Scott McPherson succeeding 17-year CEO George Holm, Performance Food Group enters its next chapter under a leader who previously ran Core-Mark’s convenience business and later served as PFG’s COO. Although acquisitions should remain part of the strategy, the firm’s recent deal activity—building out convenience distribution while adding scale in foodservice—should place greater emphasis on integration and realizing the benefits of its scaled footprint. We expect this will manifest in greater investment in customer-facing technology, internal technology standardization, and equipment upgrades, even as PFG scours the business for procurement opportunities. As a result, we forecast capital expenditures at 0.8% of sales over the next five years, above the prior five-year average of 0.6%. We think these priorities are sensible steps toward unifying PFG’s disparate operating model, but we remain skeptical that the initiatives will translate into a durable edge, given the structural differences across segments and the highly competitive landscape in which the company operates.

We are dropping coverage of Performance Food Group. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

COVID-19 caused an unprecedented shock to the food-service industry, although Performance Food Group's, PFG's, high mix of delivery-heavy pizzerias helped damp the impact, with PFG returning to prepandemic sales levels by April 2021. The firm gained market share in recent years, as its clout as the third-largest U.S. food-service distributor likely allowed it to more easily secure products among widespread shortages than its smaller peers. But with product availability improving, we suspect gains will be more challenging.

After digesting no-moat Performance Food Group’s first-quarter results, we plan to increase our $42 fair value estimate by a mid-single-digit rate. Our updated valuation reflects higher sales in the Vistar segment (now 19%, from 5.5%, with steeper inflation expectation) and a more optimistic view on PFG’s margin prospects, as its staffing has improved, allowing it to reduce temporary help and overtime costs and thereby enhance productivity. Our fiscal 2023 operating expenses as a percentage of sales should fall 10 basis points to 9.4%.

COVID-19 caused an unprecedented shock to the food-service industry, although Performance Food Group's, PFG's, high mix of delivery-heavy pizzerias helped damp the impact, with PFG returning to prepandemic sales levels by April 2021. The firm gained market share in recent years, as its clout as the third-largest U.S. food-service distributor likely allowed it to more easily secure products among widespread shortages than its smaller peers. But with product availability improving, we suspect gains will be more challenging.

COVID-19 caused an unprecedented shock to the food-service industry, although Performance Food Group's, PFG's, high mix of delivery-heavy pizzerias helped damp the impact, with PFG returning to prepandemic sales levels by April 2021. Product and labor shortages remain a problem, and we think the firm is gaining market share as a result, as its clout as the third-largest U.S. food-service distributor likely allows it to more easily secure product than its smaller competitors.

We don’t plan a material change to our $39 fair value estimate for no-moat Performance Food Group, or PFG, after digesting fourth-quarter results in line with our expectations. In the quarter, organic sales shot up 14.5% (excluding the extra week), primarily aided by food inflation (13.6%) and flat organic case volume growth. While PFG has yet to show noticeable signs of softening demand, we plan to lower our U.S. food-service industry case volume forecast to flat (from 2%) for PFG’s fiscal 2023, as consumers are more likely to eat at home to help curb inflation. Still, we are encouraged by the PFG’s share gains in all its 15 independent categories (roughly 19% of 2022 sales), despite looming threat from narrow-moat Sysco’s push into the Italian eateries. In addition, healthy growth (8.4%) in PFG’s private-label brands strikes us as positive, as we believe these products provide $0.35 per pound of incremental profit relative to the national brands, offering potential margin upside.

COVID-19 caused an unprecedented shock to the food-service industry, although Performance Food Group's, PFG's, high mix of delivery-heavy pizzerias helped damp the impact, with PFG returning to prepandemic sales levels by April 2021. Product and labor shortages remain a problem, and we think the firm is gaining market share as a result, as its clout as the third-largest U.S. food-service distributor likely allows it to more easily secure product than its smaller competitors.

We think no-moat Performance Food Group (PFG) is performing well in the current environment. Excluding the Core-Mark acquisition, third-quarter sales advanced 24% driven by 8.3% case volumes and 13.6% inflation, essentially in line with our forecast. In the food-service segment (51% of period sales) PFG continues to expand its market share per management, despite narrow-moat Sysco’s push into Italian eateries, where PFG has a stronghold. It appears that consumers are experiencing pizza fatigue after heavy consumption during the pandemic as growth in this market slowed in the quarter. We suspect the slowdown could also be attributed to inflation, given the steep rises in wheat and dairy prices. But the overall food-service market remained strong during the quarter. Per Census Bureau data, while a spike in COVID-19 cases caused some softness in January, food-service sales have been strong since February, with no sign of consumers reverting to at-home dining in the face of accelerating inflation. This applies to PFG’s convenience store segment as well (43% of sales), a channel where sales have historically been hindered by higher gas prices. While sales have remained resilient to date, the trend bears watching.

COVID-19 caused an unprecedented shock to the food-service industry, although Performance Food Group's high mix of delivery-heavy pizzerias helped damp the impact, with PFG returning to prepandemic sales levels by April 2021. Product and labor shortages remain a problem, and we think the firm is gaining market share as a result, as its clout as the third-largest U.S. food-service distributor likely allows it to more easily secure product than its smaller competitors.

We plan to modestly increase our $39 fair value estimate for no-moat Performance Food Group, or PFG, after its fiscal second-quarter gross margin was a bit better than expected and as we reverse our prior assumption that the U.S. tax rate will increase in 2022. With the shares up 13% on the report, the stock looks rich, and we suggest investors instead consider 4-star US Foods.

COVID-19 caused an unprecedented shock to the food-service industry, although Performance Food Group's high mix of delivery-heavy pizzerias helped damp the impact, with PFG returning to prepandemic sales levels in April 2021. Product and labor shortages remain a problem, and we think the firm is gaining market share as a result, as its clout as the third-largest U.S. food-service distributor likely allows it to more easily secure product than its smaller competitors.

The biggest highlight of no-moat Performance Food Group's, or PFG's, first-quarter results in our view was the 21% organic sales growth in its Vistar segment (topping our 15% estimate), as the recovery in movie theaters accelerated. The food service segment grew sales 26%, in line with our estimate, driven by midteen inflation and an ongoing recovery in traffic post-pandemic. Unlike narrow-moat Sysco, which is driving share gains via new account wins, PFG is focusing on increasing its share of wallet at existing accounts, as it is hesitant to bring on new customers given labor shortages, which is depressing service levels. While we appreciate the rationale, we think this could hurt PFG’s long-term prospects, as many new restaurants are opening in the wake of the pandemic and establishing relationships with other distributors.

COVID-19 caused an unprecedented shock to the food-service industry, although Performance Food Group's high mix of delivery-heavy pizzerias helped damp the impact, with PFG returning to prepandemic sales levels in April 2021. Product shortages remain a challenge, and we think the firm is gaining market share as a result, as its clout as the third-largest U.S. food-service distributor likely allows it to more easily secure product than its smaller competitors.

No-moat Performance Food Group reported fiscal fourth-quarter sales of $9.3 billion, 50% and 9% higher than the fourth quarters of fiscals 2020 and 2019, respectively, excluding the 53rd week. This was better than our $8.0 billion estimate and the $8.7 billion FactSet consensus. Management reported that sales have not decelerated in recent weeks, despite a pickup in the number of COVID-19 cases. Product shortages remain a challenge, and we suspect the firm could be gaining market share as a result, as its clout as the third-largest U.S. food-service distributor likely allows it to more easily secure product than its smaller competitors.

The coronavirus has caused an unprecedented shock to the food-service industry, which has thus far caused the permanent closure of 10% of restaurants and a double-digit decline in industry sales in calendar 2020. But Performance Food Group's high mix of delivery-heavy pizzerias should help dampen the impact. PFG's pro forma sales, including acquisitions, returned to prepandemic levels in April, and we believe the firm has ample liquidity to weather the storm.