Chefs’ Warehouse, Inc. — Q1 2018 Form 10-Q
Business context and period: The company distributes specialty foods and center-of-the-plate products to foodservice customers, primarily in the United States and Canada. This unaudited report covers the 13 weeks ended March 30, 2018; comparisons are with the 13 weeks ended March 31, 2017. Amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $318.6 | $287.7 |
| Gross profit / margin | $79.5 / 25.0% | $73.9 / 25.7% |
| Operating expenses | $73.8 (23.2% of sales) | $70.8 (24.6% of sales) |
| Operating income / margin | $5.7 / 1.8% | $3.1 / 1.1% |
| Interest expense | $5.0 | $5.9 |
| Net income (loss) | $0.5 | $(1.6) |
| Diluted EPS | $0.02 | $(0.06) |
| Operating cash flow | $10.5 | $8.1 |
Sales grew 10.7%, including 5.5% organic growth and 5.2% from the Fells Point acquisition. Organic specialty case count grew approximately 4.5%; excluding Fells Point, center-of-the-plate pounds sold rose 0.3%. Estimated year-over-year inflation was 3.8% in specialty and 1.5% in center-of-the-plate products.
Gross margin fell 73 basis points, mainly reflecting inflation in certain center-of-the-plate categories; the center-of-the-plate margin declined 146 basis points, while specialty margin declined 2 basis points. Operating expenses grew more slowly than sales, reducing their ratio by 145 basis points, which management attributed largely to improved facility and salesforce utilization and lower management infrastructure compensation costs. Lower interest expense reflected the prior-year-end term-loan repricing. The effective tax rate was 28.5%, versus 41.6%, with the reduction attributed to the Tax Cuts and Jobs Act.
Cash, debt and liquidity
- Cash and equivalents were $45.1 million at March 30, 2018, up from $41.5 million at December 29, 2017.
- Cash flow from operations was $10.5 million; capital expenditures were $2.9 million and acquisition payments were $2.4 million. Investing activities used $5.3 million; financing activities used $1.7 million.
- Total debt obligations were $317.1 million, including $287.6 million under the senior secured term loan and $36.8 million of convertible subordinated notes. The term-loan rate was 5.88%. The company reported compliance with debt covenants.
- No ABL borrowings were outstanding; $63.5 million was available under the ABL facility after reserving $11.5 million for letters of credit.
- Management estimated fiscal 2018 capital expenditures, excluding acquisitions, at $14 million to $16 million, to fund facility expansions and headquarters renovations. The company expected to finance recurring capital spending with operating cash and ABL borrowings.
Material changes, outlook and risks
- Fells Point, acquired in August 2017, contributed $15.0 million of Q1 2018 sales and $0.9 million of pretax income. A small tuck-in acquisition also contributed to Q1 investing cash use. A measurement-period adjustment increased Fells Point goodwill by $2.3 million and reduced customer relationships and trademarks by $1.5 million and $0.8 million, respectively.
- The company continued its ERP rollout, expected to continue through fiscal 2019; the Union City distribution-center buildout was completed in Q1. Management described growth priorities including territory expansion, operational efficiency, technology investment, product innovation, and selective acquisitions. No full-year earnings or revenue guidance was provided in the filing.
- Management cautioned that quarterly results are not necessarily indicative of full-year results. Key risks include economic conditions and discretionary spending on food away from home; food, labor, energy and other cost volatility; ability to pass costs through to customers; supply interruptions and weather; competitive pressure and low industry margins; and acquisition integration and synergy execution.
- A 100-basis-point rise in market interest rates was estimated to reduce annual after-tax earnings by approximately $2.1 million, all else equal. The company said adoption of the new lease standard was expected to materially increase balance-sheet assets and liabilities. Ordinary-course legal proceedings were not expected by management to have a material adverse effect; no material amounts were accrued.
- The company reported no material change in risk factors from its 2017 Form 10-K, no off-balance-sheet arrangements, and effective disclosure controls at period end.
Important facts for investors to verify
- Whether sales growth and customer/case trends persist, and how much growth remains attributable to acquisitions versus organic activity.
- Whether center-of-the-plate margin pressure from inflation continues and whether pricing can offset product-cost increases.
- Execution of planned capital spending, the ERP rollout, and facility utilization improvements; the filing gives no earnings or revenue forecast.
- Debt-service capacity and sensitivity to variable interest rates, including the reported $63.5 million of ABL availability and covenant compliance.
- Integration and realized contribution from Fells Point and other acquisitions, as well as the potential balance-sheet impact of the lease standard.