Chefs’ Warehouse, Inc. — Q2 2022 Form 10-Q
Reporting period: The 13 weeks ended June 24, 2022; year-to-date figures cover the 26 weeks ended June 24, 2022. Comparisons are to the periods ended June 25, 2021. Dollar amounts below are in millions unless noted.
Business context
The company distributes specialty foods and center-of-the-plate products to foodservice customers, principally independent restaurants and fine-dining establishments, across the United States and Canada. It reported one foodservice-distribution segment. Management said demand continued to recover from pandemic disruption, while inflation and labor constraints remained challenges.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $648.1 | $423.0 | $1,160.2 | $703.2 |
| Gross profit | $156.0 | $95.9 | $273.5 | $154.8 |
| Gross margin | 24.1% | 22.7% | 23.6% | 22.0% |
| Operating income (loss) | $27.6 | $4.7 | $33.9 | ($15.5) |
| Net income (loss) | $16.9 | $1.1 | $18.3 | ($16.8) |
| Diluted earnings (loss) per share | $0.42 | $0.03 | $0.47 | ($0.46) |
| Cash from (used in) operations | — | $19.8 | ($23.9) |
Q2 sales rose 53.2%; management attributed $152.3 million (36.0%) of the increase to organic growth and $72.9 million (17.2%) to acquisitions. For the first half, sales increased 65.0%, including $328.5 million of organic growth and $128.5 million from acquisitions. Management reported Q2 estimated inflation of 16.4% in specialty products and 10.9% in center-of-the-plate products; first-half estimates were 15.8% and 17.8%, respectively.
Gross margin expanded 140 basis points in Q2 and 156 basis points for the first half. SG&A increased with compensation and benefits but fell as a share of sales to 19.2% from 21.4% in Q2, and 20.2% from 24.3% for the first half, reflecting improved fixed-cost leverage. Q2 other operating expense included a $3.3 million non-cash increase in contingent earn-out fair value; first-half expense included $3.6 million of such charges. First-half interest expense declined 3.7% year over year, which the company attributed primarily to refinancing higher-rate debt.
Cash flow, debt and liquidity
- First-half operating cash flow was $19.8 million, compared with cash use of $23.9 million a year earlier. Growth in working capital used $35.6 million, primarily to support higher sales.
- Investing activities used $75.5 million, including $23.5 million of capital expenditures and $52.0 million of acquisition payments. Financing activities used $7.7 million. Cash declined by $63.3 million to $51.8 million.
- At June 24, 2022, balance-sheet debt obligations were $397.8 million, net of deferred financing fees and other adjustments, including $200 million of convertible senior notes and $4 million of convertible unsecured notes. The company separately presented $402.0 million of selected indebtedness including finance leases and other financing obligations.
- The ABL commitment was increased from $150 million to $200 million; $159.5 million was available to borrow after $20.5 million reserved for letters of credit. Cash, working capital excluding cash, and ABL availability totaled $406.5 million. Minimum liquidity under the term-loan agreement was $222.5 million.
- The company said available resources were sufficient for operating needs, capital expenditures and debt service over the next 12 months. Fiscal 2022 capital expenditures, excluding acquisitions, were estimated at $36–$45 million.
Changes, outlook and risks
- During Q2, the company completed two acquisitions for approximately $22.5 million in cash, with up to $2 million of additional contingent earn-out consideration. Capital Seaboard, acquired in December 2021, contributed $38.7 million of Q2 sales and $1.8 million of pretax income.
- On July 25, 2022, after quarter-end, the company agreed to acquire a Florida center-of-the-plate distributor for $10 million in cash, subject to a working-capital adjustment.
- No specific revenue or earnings guidance is provided. The company cautioned that interim results are not necessarily indicative of full-year results, citing seasonality, the pandemic and other factors.
- Identified risks include food, labor and fuel cost volatility; the ability to pass cost increases to customers; supply availability and distribution interruptions; customer demand and economic conditions; acquisition execution and integration; floating interest rates; and pandemic effects. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by approximately $1.4 million, all else equal.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect; no material amounts were accrued. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Key facts for investors to verify
- How much reported sales growth reflects sustainable organic volume versus price inflation and acquired revenue.
- Whether gross-margin improvement and SG&A leverage persist as inflation, labor costs and product mix change.
- Working-capital needs and operating cash conversion as sales grow, alongside the planned capital-spending range.
- Debt maturities, variable-rate exposure, ABL availability and compliance with credit-facility covenants.
- Final purchase accounting, integration results and earn-out exposure for acquisitions, including the post-quarter Florida transaction.