Chefs’ Warehouse, Inc. — Q2 2019 Form 10-Q
Business context and period: Foodservice distributor serving primarily independent restaurants and other foodservice customers. The quarter was the 13 weeks ended June 28, 2019; year-to-date results cover 26 weeks. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $411.4 | $370.4 | $768.4 | $689.1 |
| Gross profit | $106.5 | $93.2 | $196.7 | $172.8 |
| Gross margin | 25.9% | 25.2% | 25.6% | 25.1% |
| Operating income | $15.5 | $14.9 | $21.7 | $20.7 |
| Operating margin | 3.8% | 4.1% | 2.8% | 3.0% |
| Net income | $7.7 | $6.8 | $8.9 | $7.4 |
| Diluted EPS | $0.26 | $0.24 | $0.30 | $0.26 |
Q2 sales increased 11.1%; management attributed $14.6 million, or 4.0%, to organic growth and $26.4 million, or 7.1%, to acquisitions. For the six months, sales increased 11.5%, with $32.5 million from organic growth and $46.8 million from acquisitions. Q2 gross margin expanded 71 basis points, while operating expenses rose 16.2% and increased from 21.1% to 22.1% of sales. Higher distribution costs and a $2.6 million year-over-year increase in noncash contingent earn-out fair-value charges weighed on operating leverage. Operating income grew more slowly than revenue, and operating margin declined.
For the six months, operating cash flow was $21.9 million, versus $18.9 million a year earlier. Capital expenditures were $8.5 million and acquisition payments were $28.3 million; investing activities used $36.8 million. Cash fell to $24.3 million from $42.4 million at year-end 2018.
Financial position and liquidity
- At June 28, 2019, total debt obligations were $281.9 million, including a $4.0 million convertible note; long-term debt, net of current portion, was $281.6 million. Cash was $24.3 million.
- The company reported $90.0 million available to borrow under its ABL facility, after reserving $16.8 million for letters of credit, and stated it was in compliance with debt covenants.
- Operating lease adoption brought $128.9 million of operating lease right-of-use assets and $138.4 million of operating lease liabilities onto the balance sheet. Adoption had no material effect on operations or debt covenants.
Outlook, commentary, and risks
- Management expected fiscal 2019 capital expenditures, excluding acquisitions, of $24–$26 million, for distribution-facility expansions and headquarters renovations. No earnings or revenue guidance was provided.
- The February 2019 Bassian acquisition had approximately $32.0 million of consideration, funded with $28.0 million cash and a $4.0 million convertible note. Additional earn-out consideration could reach $9.0 million over four years, subject to gross-profit targets. Bassian contributed $14.8 million of Q2 sales; separate earnings disclosure was impracticable as integration began.
- Management cited sensitivity to economic conditions and customer discretionary spending, food-cost inflation or deflation, product mix, labor and fuel costs, weather, supply disruptions, and acquisition execution. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by about $2.0 million.
- 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 change to previously disclosed risk factors and no off-balance-sheet arrangements.
Key facts investors should verify
- Whether sales growth and improved gross margin persist, and whether operating-expense growth and lower operating margin reverse.
- How much future growth comes from organic volume versus acquisitions, and the performance and integration of Bassian.
- Cash generation and working-capital needs relative to planned capital spending, acquisition activity, and debt obligations.
- Potential variability in contingent earn-out liabilities and the effects of food-cost and interest-rate movements.
- Lease commitments and the execution and costs of the ERP rollout and facility projects.