Chefs’ Warehouse, Inc. — Q1 2019 Form 10-Q
Reporting period: Thirteen weeks ended March 29, 2019; comparisons are with the thirteen weeks ended March 30, 2018. The company distributes specialty foods and center-of-the-plate products to foodservice customers, primarily in the U.S. Results are unaudited.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $357.0 million | $318.6 million | +12.1% |
| Gross profit / margin | $90.2 million / 25.3% | $79.5 million / 25.0% | Margin +30 bps |
| Operating expenses | $84.0 million / 23.5% of sales | $73.8 million / 23.2% of sales | +13.9% |
| Operating income / margin | $6.2 million / 1.8% | $5.7 million / 1.8% | Income increased |
| Interest expense | $4.6 million | $5.0 million | Decreased |
| Net income / diluted EPS | $1.1 million / $0.04 | $0.5 million / $0.02 | Net income increased |
| Operating cash flow | $7.4 million | $10.5 million | Decreased $3.1 million |
Organic growth contributed $17.9 million, or 5.6%, to sales growth; acquisitions contributed $20.5 million, or 6.5%. Organic specialty-category case count grew approximately 5.2%; center-of-the-plate pounds sold rose 3.1%. Estimated inflation was 1.4% in specialty and 1.3% in center-of-the-plate. Specialty gross margin fell 39 bps, while center-of-the-plate margin increased 106 bps.
Cash, debt and liquidity
- Cash was $17.3 million at March 29, 2019, down from $42.4 million at year-end. Operating activities generated $7.4 million; investing used $32.1 million, including $28.0 million of net acquisition cash payments and $4.1 million of capital expenditures. Financing activities used $0.4 million.
- Total debt obligations were $283.5 million, including $239.7 million under the senior secured term loan, $44.2 million under the ABL facility and a $4.0 million convertible note, partly offset by deferred financing fees and discount. The term loan and ABL rates were 6.0% and 4.0%, respectively; $90.0 million was available under the ABL facility after $15.8 million reserved for letters of credit. The company reported covenant compliance.
- Adoption of lease accounting brought operating lease right-of-use assets of $118.8 million and operating lease liabilities of $127.6 million onto the balance sheet. These lease liabilities are separate from reported debt.
- Management estimated fiscal 2019 capital expenditures, excluding acquisitions, at $24–$26 million.
Material developments, outlook and risks
- On February 25, 2019, the company acquired substantially all assets of Bassian Farms, a Northern California specialty protein business, for approximately $32.0 million, subject to a working-capital adjustment. Consideration included $28.0 million cash and a $4.0 million convertible note; contingent earn-out payments could total $9.0 million. Bassian contributed $5.5 million of Q1 sales; separate earnings disclosure was impracticable during integration.
- The company adopted ASC 842 leases on December 29, 2018, without restating prior periods. Adoption resulted in a $2.0 million reduction to opening retained earnings and materially increased reported assets and liabilities, but management said it did not materially affect operations or debt covenants.
- Management’s stated priorities include expanding sales territories and facilities, improving service and operating efficiency, investing in technology, and pursuing selective acquisitions. No specific earnings or sales guidance was provided. Capital spending plans include facility expansions and headquarters renovations; ERP implementation is expected to continue through fiscal 2020.
- Management cited sensitivity to economic conditions and restaurant spending, food-cost inflation or deflation, product mix, weather, fuel costs, supply availability and disruptions, and acquisition integration and growth execution. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by approximately $2.1 million, all else equal.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect; no material amounts were accrued. The filing reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether organic sales growth and category-level volume and margin trends continue, and how acquisition contributions affect reported growth.
- Bassian’s integration, final purchase accounting, working-capital adjustment, and performance against earn-out targets.
- Cash generation and liquidity after acquisition spending and planned capital expenditures; confirm ABL availability and covenant headroom.
- Exposure to variable interest rates, debt maturities, and the potential dilution or cash obligations associated with the convertible note.
- The effect of newly recognized lease obligations and planned facility commitments on future costs and liquidity.