Chefs’ Warehouse, Inc. — Q3 2021 Form 10-Q
Reporting period: Thirteen weeks ended September 24, 2021; year-to-date figures cover thirty-nine weeks. Comparisons are with the corresponding 2020 periods. Financial amounts below are in millions unless otherwise noted.
Business context
The company distributes specialty foods and center-of-the-plate products to restaurants and other foodservice customers, primarily in the U.S. It reported sequential business improvement during 2021, while noting ongoing uncertainty from COVID-19 and its effects on customers and consumer spending.
Financial results
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Net sales | $484.3 | $254.0 | $1,187.5 | $830.0 |
| Gross profit | $110.0 | $60.4 | $264.8 | $189.3 |
| Gross margin | 22.7% | 23.8% | 22.3% | 22.8% |
| Operating income (loss) | $10.4 | $(11.9) | $(5.0) | $(54.4) |
| Net income (loss) | $3.5 | $(11.4) | $(13.4) | $(45.8) |
| Diluted earnings (loss) per share | $0.09 | $(0.31) | $(0.36) | $(1.39) |
- Q3 sales grew 90.7% year over year; management attributed $213.7 million of growth to organic sales and $16.6 million to acquisitions. For the 39-week period, sales rose 43.1%, including $322.1 million of organic growth and $35.5 million from acquisitions.
- Q3 gross margin fell about 105 basis points. Specialty-category margin improved 301 basis points, but center-of-the-plate margin declined 488 basis points, with inflation cited as a factor. Estimated year-over-year inflation was 10.9% in specialty and 28.0% in center-of-the-plate products.
- Q3 SG&A rose 30.1% to $99.4 million, largely from compensation and benefits supporting sales growth; as a share of sales it declined to 20.5% from 30.1%. Year-to-date SG&A increased 6.5%, while its sales ratio fell to 22.7% from 30.5%.
- Q3 interest expense declined 10.9% to $4.2 million; year-to-date interest expense declined 14.4% to $13.4 million. Management cited lower effective borrowing costs following refinancing and, year to date, prior-year one-time financing costs.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was a use of $26.3 million, versus $53.9 million provided in 2020. The filing attributes the 2021 use principally to a $43.7 million net working-capital investment as sales grew; accounts receivable and inventory increased materially.
- Investing cash use was $25.2 million, including $17.9 million of capital expenditures and $7.3 million for acquisitions. Financing cash use was $7.5 million. Cash decreased $59.1 million from year-end to $134.2 million.
- At September 24, cash was $134.2 million, working capital excluding cash was $138.4 million, and ABL availability was $109.5 million. The company reported total liquidity of $382.1 million under its stated measure.
- Reported debt obligations were $400.6 million net of financing-fee and premium adjustments, with $5.6 million current; the MD&A separately reports $407.5 million of principal obligations, including finance leases and other financing obligations. The company said it was in compliance with debt covenants and had $250.6 million of minimum liquidity under its credit agreement.
- In March 2021, the company issued an additional $50 million of 1.875% convertible senior notes due 2024; proceeds were used to repay higher-rate term-loan and ABL borrowings.
Outlook, risks and unusual items
- The company gave no fiscal 2021 capital-expenditure guidance, citing uncertainty about economic recovery and pandemic-related restrictions. Management believed available cash, working capital and ABL capacity would meet operating, capital, debt-service and other liquidity needs for the next 12 months.
- Management did not provide a specific sales or earnings forecast. It cautioned that the pandemic’s future effects were difficult to predict and identified risks including food, labor and fuel cost volatility, supply availability and distribution interruptions, low-margin sensitivity to inflation, customer concentration in culinary markets, financing access and acquisition execution.
- Q3 included a $0.1 million non-cash expense from changes in contingent earn-out fair value; prior-year Q3 included $4.6 million of non-cash credits. Year-to-date other operating income also declined versus 2020, partly reflecting smaller earn-out credits and a $0.6 million Cambridge trademark impairment following a brand-strategy change.
- Two acquisitions completed in Q2 2021 had an aggregate purchase price of about $8.4 million, including $7.3 million cash and $1.1 million in warrants, plus potential earn-outs of up to $4.2 million. Subsequent to quarter-end, the company acquired a Las Vegas specialty distributor for about $3.0 million cash, with up to $5.0 million of contingent consideration.
- A 100-basis-point increase in market interest rates was estimated to reduce annual after-tax earnings by approximately $2.4 million, holding other factors constant. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material amounts were accrued.
Most important facts for investors to verify
- Whether sales recovery and customer activity continued after Q3, and how much growth reflects volume, inflation and acquisitions.
- Whether food-cost inflation—especially in center-of-the-plate products—continues to pressure gross margins or can be passed through to customers.
- Whether working-capital investment moderates and operating cash flow improves as sales grow.
- Debt balances, borrowing costs, covenant compliance and available ABL capacity, including the difference between reported carrying value and principal obligations.
- Integration and performance of recent acquisitions, potential earn-out payments, and the ongoing effects of pandemic-related uncertainty.