Chefs' Warehouse, Inc. — Q2 2023 Form 10-Q
Business context and period: The company distributes specialty foods and other food products to restaurants and related customers, primarily in the U.S. and Middle East. This filing covers the 13 weeks ended June 30, 2023, and the first 26 weeks of fiscal 2023; comparisons are to the corresponding 2022 periods. Amounts below are in millions, except per-share data.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $881.8 | $648.1 | $1,601.5 | $1,160.2 |
| Gross profit / margin | $208.4 / 23.6% | $156.0 / 24.1% | $378.2 / 23.6% | $273.5 / 23.6% |
| Operating income | $25.3 | $27.6 | $37.2 | $33.9 |
| Interest expense | $12.0 | $4.5 | $22.0 | $8.8 |
| Net income | $9.9 | $16.9 | $11.3 | $18.3 |
| Diluted EPS | $0.25 | $0.42 | $0.29 | $0.47 |
| Operating cash flow | Not separately provided | Not separately provided | $10.8 | $19.8 |
Performance and material changes
- Q2 sales rose 36.1%; management attributed $181.1 million of the increase to acquisitions and $52.6 million to organic growth. Organic specialty case count increased about 10%, and center-of-the-plate pounds sold rose 5.9%.
- First-half sales increased 38.0%, with $300.8 million attributed to acquisitions and $140.5 million to organic growth.
- Q2 gross margin declined about 43 basis points. Management cited product mix, hospitality-related sales growth and lower gross profit per unit in some protein categories amid price volatility. First-half gross margin was broadly flat year over year.
- Q2 SG&A increased 43.8% to $179.0 million and rose to 20.3% of sales from 19.2%. Management cited acquisition- and facility-related costs, compensation, distribution and depreciation and amortization.
- Q2 interest expense increased 168.9%, reflecting greater debt, higher variable rates and borrowings. Net income fell 41.7% despite higher sales.
Cash, debt and liquidity
- At June 30, cash was $59.6 million, versus $158.8 million at fiscal year-end 2022. Working capital excluding cash was $320.6 million; ABL availability was $85.8 million.
- First-half operating cash flow was $10.8 million; investing cash outflow was $142.7 million, including $119.6 million for acquisitions and $23.2 million in capital expenditures. Financing provided $33.0 million, including $50.0 million in ABL borrowings.
- Inventory growth used cash; management said purchases of certain products were pulled forward and expected inventory levels to normalize during the rest of the year.
- Debt obligations reported on the balance sheet totaled $721.1 million, including $90.0 million drawn on the ABL. The company reported $387.8 million of variable-rate indebtedness; a 100-basis-point rate increase was estimated to reduce annual after-tax earnings by about $2.9 million.
Outlook, acquisitions and risks
- Management expects fiscal 2023 capital expenditures, excluding acquisitions, of approximately $50–$60 million and believes cash, working capital and ABL availability will cover operating and other liquidity needs over the next 12 months.
- After quarter-end, the company amended its ABL facility, increasing commitments from $200 million to $300 million, with maturity in March 2027.
- Fiscal 2023 acquisitions included GreenLeaf and Hardie's Fresh Foods. Purchase price allocations remained preliminary. A significant Hardie's customer was lost after acquisition, resulting in a $1.8 million intangible-asset impairment.
- Other notable exposures include food, labor, fuel and interest-rate volatility; supply and distribution disruptions; acquisition execution and integration; and the low-margin nature of the business. The filing reports no material change to previously disclosed risk factors.
- Ordinary-course legal matters were disclosed; management did not expect them, individually or collectively, to materially affect the financial statements, and no material amounts were accrued.
Important facts for investors to verify
- Whether organic growth, customer activity and acquisition contributions continue, and whether recent acquisitions deliver expected performance.
- Whether gross margins recover from Q2 pressure and SG&A growth moderates as facilities and acquisitions are integrated.
- Whether inventory normalizes and operating cash flow improves after the first-half working-capital outflow.
- Debt and interest-rate exposure, ABL availability and the effect of the July facility amendment on liquidity.
- The final acquisition valuations, earn-out obligations and any further customer-related impairments.