The Chefs’ Warehouse, Inc. — Q2 2021 Form 10-Q
Business and period: Specialty-food distributor serving restaurants and other foodservice customers, with East Coast, Midwest and West Coast operations reported as one segment. The quarter ended June 25, 2021 (13 weeks); year-to-date covers 26 weeks. Results are unaudited. Many customers remained affected by COVID-19, while management reported sequential business improvement.
Key financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $423.0 million | $200.5 million | $703.2 million | $575.9 million |
| Gross profit | $95.9 million | $43.4 million | $154.8 million | $128.9 million |
| Gross margin | 22.7% | 21.7% | 22.0% | 22.4% |
| Operating income (loss) | $4.7 million | $(25.4) million | $(15.5) million | $(42.5) million |
| Net income (loss) | $1.1 million | $(20.3) million | $(16.8) million | $(34.4) million |
| Diluted EPS | $0.03 | $(0.62) | $(0.46) | $(1.10) |
Cash flow and liquidity: First-half cash used in operating activities was $23.9 million, versus $47.6 million provided in the prior-year period. Investing used $16.7 million, including $9.6 million of capital expenditures and $7.2 million for acquisitions; financing used $5.6 million. Cash declined $46.4 million from year-end 2020 to $146.9 million. At June 25, 2021, working capital excluding cash was $116.8 million and ABL availability was $100.8 million; management’s stated liquidity total was $364.5 million.
Debt: Reported debt obligations were $401.4 million net of deferred fees and current installments; MD&A presented $405.3 million of principal/financing obligations. The company issued $50.0 million of 1.875% convertible senior notes in March, using proceeds in part to repay term-loan and ABL borrowings. ABL borrowings were $20.0 million. The company reported compliance with debt covenants and $253.4 million of minimum liquidity under its credit agreement. Variable-rate debt totaled $189.5 million; management estimated a 100-basis-point rate increase would reduce annual after-tax earnings by about $2.4 million, all else equal.
Changes, drivers, and unusual items
- Q2 sales rose 111.0% year over year; management attributed $212.6 million of growth to organic sales and $9.9 million to acquisitions. The prior-year quarter was the period most severely affected by initial pandemic restrictions. First-half sales increased 22.1%, including $108.4 million of organic growth and $18.9 million from acquisitions.
- Q2 organic specialty case count increased 122.9% and center-of-the-plate pounds increased 66.5% year over year. Estimated inflation was 10.6% in specialty and 12.1% in center-of-the-plate categories. First-half estimated inflation was 7.6% and 11.0%, respectively.
- Q2 gross margin improved about 101 basis points, with specialty margin up 629 basis points and center-of-the-plate margin down 421 basis points. First-half gross margin declined about 37 basis points. Management noted prior-year inventory-obsolescence charges of approximately $5.5 million for Q2 and $8.8 million for the first half.
- First-half SG&A fell 3.6% year over year, partly because the prior year included an approximately $15.8 million incremental bad-debt charge; Q2 SG&A rose 32.6% as costs increased to support sales growth. Prior-year bad-debt and inventory charges make comparisons less directly comparable.
- Q2 included a $0.6 million impairment to fully write down the Cambridge trademark following a brand-strategy shift toward Allen Brothers in New England. The company recognized a $1.4 million Employee Retention Tax Credit receivable and related SG&A reduction during Q2.
- Two Q2 acquisitions had approximately $8.3 million of stated purchase price, including $7.2 million cash and $1.1 million in warrants, plus up to $3.4 million of contingent earn-outs. Acquisition valuations were still being finalized.
Outlook, risks, and contingencies
The company provided no fiscal 2021 capital-expenditure guidance, citing uncertainty about economic recovery and pandemic-related restrictions. Management believed available cash, working capital, and ABL capacity were sufficient for operating, capital, and debt-service needs over the next 12 months. It gave no sales or earnings forecast. The future effects of COVID-19 remained uncertain and dependent on outbreaks, government responses, vaccination and treatment developments, and consumer spending.
Other stated risks include food, labor and fuel cost volatility; the ability to pass inflation through to customers; product availability and distribution interruptions; low-margin operations; economic conditions and customer demand; financing and interest-rate exposure; acquisition integration and growth execution. The company said there were no material changes to previously disclosed risk factors. Ordinary-course legal proceedings were not expected by management to have a material adverse effect, and no material amounts were accrued. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the strong year-over-year sales rebound persists beyond the unusually weak pandemic comparison period, and how much reflects volume, inflation, and acquisitions.
- Whether center-of-the-plate margin pressure and elevated food inflation affect future profitability or can be passed through to customers.
- Whether sales growth converts to operating cash flow, given first-half cash use and investment in receivables and inventory.
- Debt maturities, covenant headroom, variable-rate exposure, and potential dilution from convertible notes and acquisition warrants.
- Final purchase accounting and earn-out obligations for the Q2 acquisitions, and the effect of the Cambridge trademark impairment and tax credit on comparability.