Chefs’ Warehouse, Inc. — Q3 2019 Form 10-Q
Reporting period: Thirteen weeks ended September 27, 2019; year-to-date results cover thirty-nine weeks. The company distributes specialty foods and center-of-the-plate products through East Coast, Midwest and West Coast operations, reported as one foodservice-distribution segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $396.9 million | $361.5 million | $1,165.3 million | $1,050.6 million |
| Gross profit / margin | $102.0 million / 25.7% | $92.0 million / 25.4% | $298.7 million / 25.6% | $264.8 million / 25.2% |
| Operating income / margin | $10.6 million / 2.7% | $10.3 million / 2.8% | $32.3 million / 2.7% | $31.0 million / 2.9% |
| Net income | $4.4 million | $4.2 million | $13.3 million | $11.5 million |
| Diluted EPS | $0.15 | $0.14 | $0.45 | $0.40 |
Q3 sales increased 9.8%; management attributed 4.5 percentage points to organic growth and 5.3 points to acquisitions. Year-to-date sales rose 10.9%, with 4.6 points from organic growth and 6.3 points from acquisitions. Q3 organic specialty-category case count grew about 3.2%; center-of-the-plate pounds sold rose about 0.9%.
For the first 39 weeks, operating cash flow was $23.5 million, versus $33.5 million a year earlier. Investing cash outflow was $40.4 million, including $28.1 million for acquisitions and $12.3 million of capital expenditures; financing cash outflow was $4.1 million. Cash declined to $21.5 million from $42.4 million at fiscal year-end 2018.
Balance sheet and liquidity
At September 27, 2019, total debt obligations were $282.4 million, including $238.1 million under the term loan, $43.2 million under the ABL facility and a $4.0 million Bassian convertible note, before other financing obligations and deferred financing adjustments. Cash was $21.5 million. The company reported $90.1 million available to borrow under its ABL facility, after $16.6 million reserved for letters of credit, and stated it was in compliance with debt covenants.
Current assets were $325.4 million and current liabilities $138.4 million. Adoption of lease accounting in 2019 added $131.7 million of operating lease right-of-use assets and $141.8 million of operating lease liabilities at quarter-end; adoption did not materially affect earnings or debt covenants.
Changes, outlook and notable items
- Gross margin improved year over year, but operating margin declined as operating expenses grew faster than sales. The operating expense ratio rose 40 basis points in Q3 and 60 basis points year to date, driven partly by higher contingent earn-out charges and warehouse costs, including Texas investment and the new Los Angeles facility.
- Q3 contingent earn-out fair-value charges included in operating expenses were $2.5 million, compared with $1.8 million a year earlier. Year-to-date charges were $5.3 million versus $2.0 million. These are non-cash remeasurement expenses.
- The February 2019 Bassian acquisition cost approximately $31.8 million, including cash and a $4.0 million convertible note; additional earn-out consideration could total up to $9.0 million over four years. Bassian contributed $14.9 million of Q3 sales and $35.2 million year to date. Management said separate earnings disclosure was impracticable due to integration.
- Management lowered its fiscal 2019 capital-expenditure outlook, excluding acquisitions, to $18–$20 million from $24–$26 million because of changes in the timing of planned facility expansions. No revenue or earnings guidance was stated in the provided filing text.
- Management cited sensitivity to economic conditions, discretionary spending, weather, food-cost inflation or deflation, fuel costs, supply availability and low distribution margins. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by approximately $2.0 million, holding other factors constant.
- Legal proceedings arise in the ordinary course of business; management did not expect them, individually or collectively, to have a material adverse effect and reported no material accrual. No material risk-factor changes were reported. The company disclosed no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether organic sales and case-volume growth continue, particularly in specialty products and center-of-the-plate categories.
- Whether gross-margin gains can offset higher warehouse, acquisition-related and other operating costs.
- Cash conversion and working-capital trends, given lower year-to-date operating cash flow and increased inventory and acquisition spending.
- Debt, variable-rate exposure, ABL availability and the potential cash or dilution effects of the Bassian note and earn-outs.
- Execution of facility and ERP investments, and whether the reduced capital-spending forecast or acquisition integration affects expected growth and efficiency.