The Chefs’ Warehouse, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 25, 2020 (52 weeks); the filing also reports fourth-quarter results. The company distributes specialty food and center-of-the-plate products to foodservice customers in the U.S. and Canada. Fiscal 2020 was materially affected by COVID-19 restrictions on restaurants and other customers.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $1,111.6 million | $1,591.8 million | Down 30.2% |
| Gross profit | $248.2 million | $386.6 million | Down 35.8% |
| Gross margin | 22.3% | 24.3% | Down about 196 basis points |
| Operating income (loss) | $(102.7) million | $50.7 million | Turned to loss |
| Net income (loss) | $(82.9) million | $24.2 million | Turned to loss |
| Diluted EPS | $(2.46) | $0.81 | Turned to loss |
| Cash provided by operations | $42.9 million | $45.0 million | Down $2.1 million |
Annual sales included $136.5 million from acquisitions, while organic sales declined $616.7 million. Specialty-category case count fell about 43.5%; center-of-the-plate pounds sold declined 38.0%. The specialty gross margin contracted 441 basis points, while center-of-the-plate margin increased 117 basis points.
Fourth quarter: Net sales were $281.7 million versus $426.5 million a year earlier. The company recorded an operating loss of $48.3 million and net loss of $37.1 million, compared with operating income of $18.4 million and net income of $10.9 million in Q4 2019. Q4 included a $24.2 million trademark impairment charge.
Cash, liquidity and debt
- Year-end cash and cash equivalents were $193.3 million, up from $140.2 million. A further $50.3 million was available under the ABL facility.
- Working capital was $287.6 million, compared with $303.0 million. Excluding cash, working capital was $94.3 million, versus $162.8 million.
- Operating cash flow was $42.9 million; investing cash outflow was $68.0 million, including $60.9 million for acquisitions and $7.0 million of capital expenditures. Financing cash inflow was $78.1 million.
- Debt components included $201.6 million of term loans, $154.0 million of convertible notes, $40.0 million drawn on the ABL, and $15.8 million of finance leases and other financing obligations. The company reported approximately $411.4 million of total indebtedness.
- In June 2020, the company extended the maturity of most term loans by three years, to 2025, while increasing the spread on that tranche. It also raised $85.9 million net through common-stock offerings, issuing 6.6 million shares.
- The company said liquidity was sufficient for expected needs over the next 12 months and reported compliance with debt covenants at year-end. A minimum-liquidity covenant applies under specified conditions; reported covenant-defined liquidity was $248.9 million.
Material changes, outlook and risks
- COVID-19 caused an abrupt drop in restaurant and foodservice demand, most notably in Q2. Management reported $15.8 million of estimated incremental bad-debt expense and $14.6 million of estimated inventory obsolescence charges. Receivables allowance increased to $24.0 million from $8.8 million.
- The company reduced costs through compensation actions, lower fixed costs and postponed capital spending, while maintaining customer-facing resources. It launched the “Shop Like a Chef” direct-to-consumer platform and shifted purchasing toward higher-demand products.
- Acquisitions included Sid Wainer and Cambridge Packing in 2020. Sid Wainer contributed $89.6 million of sales and an operating loss of $9.6 million during the year, according to the filing.
- In Q4, management chose to transition west-coast branding toward Allen Brothers and recorded a $24.2 million impairment of Del Monte and Bassian Farms trademarks. The planned brand transition was to begin in Q2 2021. Goodwill was not impaired in the interim or annual tests, but future impairment remains possible.
- The filing provides no specific FY2021 revenue or earnings guidance and no capital-expenditure guidance, citing uncertainty around the economic recovery and pandemic restrictions. Management’s stated strategic priorities include restoring sales, expanding customer and product penetration, improving margins, efficiency and selective acquisitions.
- Key risks include continued pandemic effects, customer credit losses and restaurant closures, low margins and food-cost volatility, competition, labor and supply-chain pressures, acquisition integration, and substantial debt with variable-rate exposure. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by about $1.8 million.
- The company reported no known pending or threatened legal proceeding expected to have a material adverse effect. The auditor gave an unqualified opinion on the financial statements and internal controls; goodwill valuation was identified as a critical audit matter.
Important facts for investors to verify
- Whether restaurant demand, organic volume and gross margins recover, and how restrictions and customer failures affect receivables.
- Cash generation, ABL availability, covenant headroom, debt maturities and the refinancing implications of the 2024 convertible notes and 2025 term-loan tranche.
- Whether acquisition performance and integration—particularly Sid Wainer—meet expectations, and whether further impairment charges arise.
- Effects of share issuance and potential conversion of $154.0 million of convertible debt on per-share value and dilution.
- Execution and customer response to the west-coast brand transition, and progress on the ERP rollout and cost reductions.