Chefs' Warehouse, Inc. — Q1 2020 Form 10-Q
Reporting period: Thirteen weeks ended March 27, 2020; comparisons are with the thirteen weeks ended March 29, 2019. The company distributes specialty foods and other products to foodservice customers, primarily independent restaurants and fine-dining establishments.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $375.4 million | $357.0 million |
| Gross profit / margin | $90.9 million / 24.2% | $90.2 million / 25.3% |
| Operating income (loss) | $(17.0) million | $6.2 million |
| Net income (loss) | $(14.1) million | $1.1 million |
| Diluted earnings (loss) per share | $(0.48) | $0.04 |
| Cash provided by operating activities | $22.0 million | $7.4 million |
Sales increased 5.2% overall, as $41.9 million of acquisition-related growth more than offset a $23.5 million, or 6.6%, organic decline. Gross profit was nearly flat, while gross margin fell about 105 basis points. Operating expenses rose 28.4% to $107.9 million, including an estimated $15.8 million non-cash incremental bad-debt charge; a $6.8 million credit from lower contingent earn-out valuations partly offset expenses. The company recorded an estimated $3.3 million inventory-obsolescence charge related to COVID-19. The income-tax line was a benefit of $8.1 million, reflecting a negative provision; the company reported a $36.5% effective tax rate and an $8.8 million tax-refund receivable.
Operating cash flow benefited from non-cash charges and working-capital movements, including cash generated from accounts receivable. Investing activities used $66.5 million, mainly for $63.5 million of acquisitions. Financing activities provided $98.0 million, principally from a $100.0 million draw on the asset-based loan facility.
Balance sheet and liquidity
At March 27, 2020, cash and cash equivalents were $193.5 million, up from $140.2 million at December 27, 2019. Total debt obligations were $499.9 million, including $100.0 million drawn on the asset-based facility; aggregate debt principal was reported as $492.1 million. The company had $33.4 million of remaining ABL availability after reserving $16.6 million for letters of credit. It reported compliance with debt covenants. Working capital excluding cash was $146.7 million, versus $162.8 million at year-end.
Management said cash, working capital and available facility capacity were expected to meet operating, capital-expenditure and debt-service needs for the next 12 months. As of April 30, cash was approximately $200.0 million and ABL availability remained $33.4 million.
Material developments, outlook and risks
- COVID-19: Restaurant and other customer closures or shifts to takeout and delivery materially affected demand. Organic case count declined about 5% in specialty products; center-of-the-plate pounds sold fell 10%. Management described future demand, consumer behavior and reopening timing as uncertain.
- Response: The company pursued retail and direct-to-consumer channels, including its Shop Like a Chef online platform; shifted purchasing toward higher-demand products; and implemented salary reductions, furloughs, layoffs and other cost controls. It reported no supplier-procurement difficulties to date.
- Capital spending: Fiscal 2020 capital expenditures, excluding acquisitions, were expected to be $10–12 million, reduced from the original $38–42 million plan due to postponed investments.
- Acquisitions: Sid Wainer & Son was acquired for approximately $46.5 million cash, with potential earn-out consideration of up to $4.0 million. A New England specialty distributor was acquired for approximately $17.0 million, with up to $3.0 million of potential earn-out consideration. Sid Wainer contributed $25.8 million in sales and a $1.1 million operating loss during the quarter.
- Impairment and other items: Interim goodwill and long-lived-asset tests found no impairment at March 27, but management warned further COVID-19 developments could lead to future impairment. The board also adopted a preferred-stock purchase-rights agreement, scheduled to expire March 21, 2021 unless earlier terminated under its terms.
- Other risks: The filing highlights uncertainty around COVID-19 effects on customer demand, liquidity, supply chains, staffing and access to capital, as well as food-cost, labor, fuel and interest-rate exposures. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by approximately $2.1 million.
Most important facts for investors to verify
- Whether restaurant demand and organic sales recover, and whether retail or direct-to-consumer sales can offset continued weakness in core foodservice channels.
- Whether the $25.6 million accounts-receivable allowance and inventory valuation adequately reflect customer credit and obsolescence risks.
- Whether cash generation, ABL availability and covenant compliance remain sufficient as conditions evolve and debt service continues.
- Whether acquisition performance, purchase-price allocations and contingent earn-outs develop as expected.
- Whether impairment assumptions remain supportable and the anticipated tax refund is realized.