Chefs’ Warehouse, Inc. — Form 10-Q Summary
Reporting period: 13 and 39 weeks ended September 26, 2014; comparisons are to periods ended September 27, 2013. Amounts are in millions unless otherwise noted. The company distributes specialty foods and related products to foodservice customers, primarily independent restaurants and fine-dining establishments, and also sells premium meats directly to consumers.
Financial performance
| Metric | Third quarter 2014 | Third quarter 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net sales | $208.1 | $170.6 | $608.4 | $480.2 |
| Gross profit | $50.7 | $44.0 | $149.2 | $123.1 |
| Gross margin | 24.4% | 25.8% | 24.5% | 25.6% |
| Operating income | $9.0 | $9.4 | $21.3 | $26.4 |
| Net income | $4.2 | $4.2 | $9.0 | $12.2 |
| Diluted EPS | $0.17 | $0.20 | $0.36 | $0.58 |
- Third-quarter sales grew 22.0%; management attributed approximately 11.4 percentage points to Allen Brothers and 10.6 points to organic growth. Year-to-date sales grew 26.7%, including 17.1 points from acquisitions and 9.7 points from organic growth.
- Despite higher sales, gross margin declined 143 basis points in the quarter and 114 basis points year to date. Management cited a higher protein mix, Allen Brothers’ performance, and food-cost inflation that could not be fully passed through.
- Quarterly operating income fell 4.3%, while net income was nearly unchanged. Year-to-date operating income declined 19.1% and net income declined 25.8%. Year-to-date operating expenses rose 32.2%, faster than sales; expenses included higher shipping, catalog promotion, infrastructure, IT and integration costs.
- Management reported food inflation of approximately 5.6% for the quarter and 5.4% for the 39-week period, versus 2.7% and 3.3%, respectively, in the comparable prior periods.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $0.6 million, down from $14.7 million. The filing attributes the decline to lower net income and increased working-capital use, particularly receivables and inventory.
- Investing cash outflow was $15.3 million, including $15.8 million of capital expenditures; there were no acquisitions during the period. Financing cash outflow was $0.1 million. Cash decreased $14.9 million to $5.2 million.
- Total debt obligations were $144.8 million at September 26, 2014, including $100 million of 5.9% senior secured notes due 2023, a $28.5 million term loan, an $11 million New Markets Tax Credit loan, and $5.3 million of capital leases and financed software. Current debt was $7.3 million.
- The company reported $135.2 million available under its $140 million revolving facility, after reserving $4.8 million for letters of credit. It stated that cash and available credit were sufficient for operations and planned capital expenditures over the next 12 months.
- Current assets were $178.7 million and current liabilities $62.0 million. The company reported compliance with debt covenants as of September 26. On November 4, 2014, subsequent to quarter-end, lenders amended the credit and note agreements to remove the minimum fixed-charge coverage requirement as of September 30 and revise its definition to reflect growth investments.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management’s stated priorities include expanding sales territories and facilities, improving service and purchasing, introducing products, upgrading systems, and controlling expenses.
- Fiscal 2014 capital expenditures, excluding acquisitions, were projected at approximately $32.3 million. The company expected to spend approximately $14 million more to complete projects by mid-2015, including Bronx and Las Vegas facilities, a Chicago distribution center and its JD Edwards ERP implementation.
- Management warned that results are exposed to economic and consumer-spending conditions, weather and supply interruptions, food-price volatility, the ability to pass on cost increases, customer losses, low industry margins, acquisition integration, growth-related infrastructure demands and financing needs. Results may also vary seasonally; direct-to-consumer meat sales are typically higher in the fourth quarter.
- In the quarter, the company received approximately $1.5 million from former Michael’s Finer Meats owners to settle an inventory-related dispute; it recorded the amount as a reduction of operating expenses. The filing’s forward-looking-statement risk discussion also refers to the Michael’s accounting issue, investigation and potential recovery.
- The company received $0.5 million from Qzina’s former owners relating to a working-capital dispute, reducing goodwill by $0.4 million and offsetting $0.1 million of legal fees. A November 3 subsequent event finalized Allen Brothers’ purchase price, with approximately $2.1 million of reimbursements expected; these were not reflected in the statements.
- Management said disclosure controls were effective and reported no material changes in internal control over financial reporting. It reported no material change to the risk factors in its latest Form 10-K and no material adverse effect expected from ordinary-course legal proceedings.
Important facts for investors to verify
- Whether organic growth and acquisition contributions, particularly Allen Brothers, translate into sustainable operating profit as gross margins remain below prior-year levels.
- Whether food inflation can be passed through to customers and whether protein mix, shipping, promotion, integration and infrastructure costs moderate.
- Working-capital trends and operating cash generation, given the sharp year-to-date decline in operating cash flow and the increase in receivables and inventory.
- The effect of the November 4 covenant amendments, ongoing compliance, available revolver capacity and funding for planned capital spending or acquisitions.
- The status and financial implications of the Michael’s accounting issue and recovery, and the timing and receipt of the Allen Brothers reimbursements.