The Chefs’ Warehouse, Inc. — Q3 2023 Form 10-Q
Reporting period: Thirteen weeks ended September 29, 2023; year-to-date figures cover 39 weeks. Amounts below are in millions of dollars unless stated otherwise. The company distributes specialty foods and other foodservice products through one reportable segment.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Net sales | $881.8 | $661.9 | $2,483.3 | $1,822.1 |
| Gross profit | $207.7 | $157.8 | $585.9 | $431.3 |
| Gross margin | 23.6% | 23.8% | 23.6% | 23.7% |
| Operating income | $25.5 | $22.1 | $62.8 | $56.0 |
| Net income | $7.3 | $8.3 | $18.6 | $26.6 |
| Diluted EPS | $0.19 | $0.21 | $0.49 | $0.68 |
- Q3 sales grew 33.2%; management attributed $172.9 million, or 26.1%, of the increase to acquisitions and $46.9 million, or 7.1%, to organic growth. Year-to-date sales rose 36.3%, with 26.0% from acquisitions and 10.3% organic.
- Q3 gross margin declined about 29 basis points. SG&A rose 37.9% and increased to 20.4% of sales from 19.7%, reflecting acquisition and facility costs, compensation, and distribution expenses. Year-to-date SG&A rose 41.1% and reached 20.7% of sales.
- Year-to-date interest expense increased 70.6% to $33.4 million, mainly due to higher debt balances and variable interest rates. The effective tax rate was 48.3% for Q3 and 36.8% year to date, including a $2.1 million return-to-provision tax adjustment.
Cash flow, liquidity and debt
- For the 39 weeks, operating cash flow was $20.0 million, down from $31.7 million. Inventory and receivables growth used cash; management said inventory purchases had been pulled forward and expected inventory levels to normalize during the rest of the year.
- Investing cash outflow was $155.7 million, including $120.6 million for acquisitions and $35.1 million of capital expenditures. Financing cash inflow was $10.5 million, including $50.0 million of net ABL borrowings.
- At September 29, cash was $33.1 million, versus $158.8 million at December 30, 2022. Working capital excluding cash was $338.3 million, and ABL availability was $149.8 million. Management stated available liquidity was sufficient for expected needs over the next 12 months.
- Reported debt obligations, including finance leases and other financing obligations, totaled $701.2 million net of unamortized costs; the MD&A’s selected indebtedness table reports $718.0 million on its stated basis. Variable-rate debt was $367.0 million; management estimated a 100-basis-point rate increase would reduce annual after-tax earnings by about $2.7 million.
Material developments, outlook and risks
- Fiscal 2023 acquisitions included GreenLeaf for $86.1 million, Hardie’s Fresh Foods for about $42.0 million, and three other acquisitions for about $17.7 million. The acquisitions contributed to sales growth; purchase price allocations for several were preliminary. The company also acquired Chef Middle East in November 2022.
- The ABL commitment increased from $200 million to $300 million, with maturity in March 2027. The company prepaid $20 million of its term loan in August. A $4 million convertible unsecured note matured and was repaid in June; the 2024 convertible notes remain outstanding.
- A $1.8 million impairment was recorded after a significant Hardie’s Fresh Foods customer was lost post-acquisition. Acquisition-related earn-out liabilities were measured using estimates that could change materially.
- Expected fiscal 2023 capital expenditures, excluding acquisitions, were approximately $45 million to $55 million. The filing provides no sales or earnings guidance. Management cited inflation, food and labor costs, supply availability, fuel costs, interest rates, economic conditions, weather, acquisition execution and integration, and customer demand as risks.
- The filing disclosed an immaterial prior-period tax error and recorded a $2.1 million current-period adjustment. Management said disclosure controls were effective; ordinary-course legal proceedings were not expected to have a material adverse effect, and no material amounts were accrued.
Key facts for investors to verify
- Whether acquired businesses deliver expected growth and synergies, and whether preliminary acquisition valuations or earn-out estimates change.
- Whether inventory and receivables normalize as management expected, and whether operating cash flow improves.
- Whether margin pressure, higher SG&A, and increased interest costs persist; monitor variable-rate exposure and upcoming debt maturities, including the 2024 convertible notes.
- The impact of the lost Hardie’s customer on acquired operations and any further intangible-asset impairment.
- Whether the tax adjustment, expected $22.5 million income-tax refund, and related tax estimates are resolved as anticipated.