Chefs' Warehouse, Inc. quarterly report, Q1 FY2023

Chefs’ Warehouse, Inc. — Q1 2023 Form 10-Q

Reporting period: Thirteen weeks ended March 31, 2023, compared with thirteen weeks ended March 25, 2022. The company distributes specialty foods and other products to foodservice customers, primarily independent restaurants and fine-dining establishments, in the U.S. and Middle East.

Financial performance

MetricQ1 2023Prior periodChange
Net sales$719.6 million$512.1 million+40.5%
Gross profit / margin$169.7 million / 23.6%$117.5 million / 22.9%+44.4% gross profit; margin +64 bps
Operating income$11.9 million$6.3 million+89.9%
Interest expense$10.0 million$4.4 million+129.2%
Net income$1.4 million$1.4 millionApproximately flat
Operating cash flow$(2.3) million$10.3 millionDecreased $12.5 million

Net income per diluted share was $0.04 in both periods. SG&A rose 41.8% to $156.1 million and was 21.7% of sales versus 21.5%. Net sales growth comprised $87.9 million of organic growth (17.1%) and $119.7 million from acquisitions (23.4%). Organic case count in specialty products grew about 16.8%; center-of-the-plate pounds sold grew 14.4%. Estimated inflation was 5.5% in specialty and 3.2% in center-of-the-plate categories.

Liquidity, debt and cash flow

At March 31, 2023, cash was $91.7 million, down from $158.8 million at fiscal year-end. Working capital excluding cash was $300.9 million, and $135.8 million was available under the asset-based loan facility. Total debt and other financing obligations were reported as $686.8 million; debt obligations on the balance sheet, net of deferred costs, were $667.6 million. The company had $340.7 million of variable-rate debt and stated that a 100-basis-point rate increase would reduce annual after-tax earnings by about $2.5 million.

Operating cash use reflected a $20.1 million increase in inventories and other working-capital movements; management said inventory purchases were strategically pulled forward and expected inventory levels to normalize during the rest of the year. Investing cash use was $59.6 million, including $50.9 million for acquisitions and $8.7 million of capital expenditures. Financing cash use was $5.1 million.

Changes, outlook and notable items

  • Gross margin improved overall, led by a 65-basis-point increase in specialty; center-of-the-plate margin declined 68 basis points, which management attributed to higher inflationary impacts on certain products.
  • Interest expense more than doubled, primarily due to higher debt balances, increased variable rates and prior financing activity. The increase offset much of the improvement in operating income.
  • Q1 acquisitions included Hardie’s Fresh Foods for approximately $38 million cash, plus potential earn-out consideration of up to $10 million, and two other acquisitions for approximately $14.4 million, plus potential earn-outs of up to $2 million. Acquisitions contributed $20.2 million in sales and $1.8 million in pretax income during the quarter.
  • After quarter-end, the company acquired substantially all assets of Greenleaf Produce and Specialty Foods for an initial $80 million, funded partly by a $40 million incremental draw on its asset-based facility. The purchase-price allocation was not yet available.
  • Management forecast fiscal 2023 capital expenditures, excluding acquisitions, of approximately $50–$60 million and said existing cash, working capital and facility availability should meet liquidity needs for the next 12 months. No revenue or earnings guidance was provided in the filing.
  • Risks highlighted include food, labor, fuel and interest-rate volatility; low margins and the ability to pass through cost increases; supply availability and distribution interruptions; acquisition integration and growth execution; and economic or weather-related impacts in concentrated markets. Ordinary-course legal matters were not expected by management to have a material adverse effect; no material risk-factor changes were reported.

Important facts for investors to verify

  • Whether organic volume growth and margin improvement continue as inflation and product mix change, particularly in center-of-the-plate products.
  • Whether inventory normalizes and operating cash flow improves after the Q1 working-capital investment.
  • Debt service and refinancing exposure, including the 2024 convertible notes, variable-rate borrowings and the effect of further rate increases.
  • Integration, purchase accounting and performance of recent acquisitions, including contingent earn-out obligations and the Greenleaf acquisition.
  • Whether the planned $50–$60 million capital expenditure range and management’s 12-month liquidity assessment remain appropriate.