Chefs' Warehouse, Inc. quarterly report, Q3 FY2020

Business context and reporting period

The Chefs’ Warehouse, Inc. distributes specialty foods and other foodservice products, principally to independent restaurants and other culinary businesses. This unaudited Form 10-Q covers the 13 weeks and 39 weeks ended September 25, 2020; comparisons are with periods ended September 27, 2019. Results were materially affected by COVID-19 restrictions and reduced restaurant demand.

Key financial results

Quarterly SG&A was $76.7 million (30.2% of sales), down 8.6% in dollars year over year; for the 39 weeks it was $254.5 million, up 3.0%. Other operating income was $4.1 million in the quarter and $9.8 million year to date, primarily reflecting non-cash reductions in contingent earn-out liabilities. Interest expense was $4.7 million for the quarter and $15.6 million year to date.

At September 25, 2020, cash and cash equivalents were $208.5 million. Total current assets were $438.8 million and total current liabilities were $135.1 million. Debt obligations were $402.5 million carrying value, including $40.0 million drawn on the asset-based loan facility and $14.8 million of finance lease and other financing obligations. The company reported $44.3 million of remaining ABL borrowing availability, $250.4 million of minimum liquidity under its credit agreement, and compliance with all debt covenants. The filing’s selected-liquidity table reports $347.9 million, comprising cash, working capital excluding cash, and ABL availability.

Material changes versus the prior comparable periods

• COVID-19 drove organic sales declines of $178.1 million, or 44.9%, in the quarter and $439.2 million, or 37.7%, for the 39 weeks. Acquisitions contributed $35.3 million and $103.9 million, respectively.
• Quarterly specialty-category case count declined approximately 49.3%; center-of-the-plate pounds sold declined 45.4%. Year-to-date declines were 42.1% and 36.9%, respectively.
• Year-to-date operating cash flow rose despite the net loss, principally because reduced demand released $64.5 million of working capital. Investing cash outflow was $65.8 million, including $60.4 million for acquisitions; financing cash inflow was $80.5 million, including equity proceeds.
• The company issued 6.6 million common shares in May and June, raising approximately $85.9 million net. Shares outstanding increased from 30.3 million at December 27, 2019 to 37.8 million at September 25, 2020.
• The company acquired Sid Wainer & Son for approximately $44.1 million and another New England specialty distributor for approximately $16.4 million. Sid Wainer contributed $66.5 million of year-to-date sales and recorded a $5.6 million operating loss.
• The company amended its term loan in June, extending the maturity of a $170.8 million tranche to 2025 while increasing its rate to LIBOR plus 5.5%; the remaining $31.2 million tranche matures in 2022. The amendment also introduced a minimum-liquidity covenant.

Outlook, management commentary, risks and unusual items

• Management said the duration and effects of COVID-19 were uncertain. It pursued retail and direct-to-consumer channels, adjusted purchasing toward in-demand products, and reduced costs through compensation actions and deferred capital spending.
• Fiscal 2020 capital expenditures, excluding acquisitions, were expected to be $8–$10 million, reduced from the original $38–$42 million estimate. Management believed cash, working capital and ABL availability were sufficient for requirements over the next 12 months; no sales or earnings guidance was provided.
• COVID-19 led to estimated non-cash charges of $15.8 million for incremental bad debt and approximately $9.8 million for inventory obsolescence during the 39 weeks. Specialty gross margins were pressured by mix and inventory losses, while center-of-the-plate margins benefited from higher retail sales.
• Interim goodwill and long-lived asset tests performed in March found no impairment; management reported no further triggering events in the second or third quarters but warned that future impairment charges remain possible.
• The company reclassified food processing costs from operating expenses to cost of sales and revised operating-expense presentation following SEC staff comments. The reclassifications did not affect operating income, net income or cash flows. The filing also disclosed a non-material prior-period error in weighted-average shares that had understated second-quarter 2020 loss per share; those figures were restated.
• The CARES Act enabled an expected income tax refund receivable of $21.0 million. A 100-basis-point rise in market rates was estimated to reduce annual after-tax earnings by approximately $1.6 million. Management said ordinary-course litigation was not expected to have a material adverse effect.

Important facts for investors to verify

• Whether restaurant capacity restrictions and customer demand recover, and how that affects organic sales, margins, receivables and inventory.
• Whether the expected tax refund is realized and whether elevated bad-debt and inventory reserves prove adequate.
• Debt maturity, interest-rate exposure, covenant headroom and the availability of ABL financing as operating conditions evolve.
• Acquisition performance, including Sid Wainer’s operating losses and any contingent earn-out payments.
• Potential future impairment charges and the assumptions supporting the company’s March impairment assessments.
• The impact of the equity issuance on per-share results and the restated second-quarter share-count and EPS figures.