Chefs’ Warehouse, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. The company distributes specialty foods and other products to restaurants and related foodservice customers, primarily in the United States and Canada. This unaudited report covers the 13 weeks ended March 26, 2021; the comparable period ended March 27, 2020. The company attributes continued customer and sales disruption to COVID-19.
Key financial metrics
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $280.2 | $375.4 |
| Gross profit / gross margin | $58.9 / 21.0% | $85.5 / 22.8% |
| Operating loss | $(20.1) | $(17.1) |
| Net loss / diluted loss per share | $(17.9) / $(0.49) | $(14.1) / $(0.48) |
| Cash from (used in) operations | $(11.7) | $22.0 |
| Capital expenditures | $2.9 | $3.1 |
- Sales declined 25.4%. Management reported organic sales down $105.0 million, or 28.0%, partly offset by $9.8 million of acquisition-related sales growth.
- Gross margin fell about 173 basis points. SG&A was $80.2 million, or 28.6% of sales, versus $108.9 million, or 29.0%.
- At March 26, cash was $175.0 million; working capital excluding cash was $94.1 million; and ABL availability was $53.8 million. The company reported total liquidity of $322.9 million.
- Balance-sheet debt obligations were $402.5 million, including $200.0 million principal of convertible senior notes, $170.0 million of term loans, $20.0 million under the ABL facility, and $16.4 million of finance lease and other financing obligations. The filing separately reports $410.4 million in its selected indebtedness table; investors should check the table definitions and reconciliation.
Material changes versus the prior period
- Management identified COVID-19 as the primary driver of the organic sales decline. Specialty-category case count fell approximately 39.4%; center-of-the-plate pounds sold declined 27.6%.
- Gross margin pressure reflected cost inflation and unfavorable sales mix: margins declined 24 basis points in specialty and 253 basis points in center-of-the-plate.
- Operating cash flow swung from $22.0 million provided to $11.7 million used. The prior-year period included a $15.8 million non-cash incremental bad-debt charge, which affected the year-over-year comparison.
- On March 1, the company issued an additional $50.0 million of 1.875% convertible senior notes due 2024. Proceeds repaid the $31.2 million 2022 term-loan tranche and reduced ABL borrowings. The company also paid $32.8 million on debt, finance leases and other financing obligations during the quarter.
Outlook, risks and other notable items
- The company provided no fiscal 2021 capital-expenditure guidance, citing uncertainty about economic recovery and pandemic restrictions. It said available cash, working capital and ABL capacity should cover operating needs, capital expenditures and debt service for the next 12 months.
- Management said the pandemic’s future effect on business, operations and liquidity was difficult to predict and dependent on infection trends, government responses, vaccination progress, treatments and consumer spending.
- The company reported compliance with debt covenants and $240.6 million of minimum liquidity under its credit-agreement definition. A 100-basis-point increase in market rates was estimated to reduce annual after-tax earnings by about $1.4 million.
- Subsequent to quarter-end, the company agreed to acquire substantially all assets of a New England specialty center-of-the-plate producer and distributor for approximately $6.0 million in cash, plus up to $4.0 million of contingent consideration.
- 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, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- How restaurant reopening, customer activity and pandemic-related restrictions affect sales, case volumes and liquidity after March 26, 2021.
- The drivers and sustainability of gross-margin declines, including food-cost inflation and product mix.
- The reconciliation of the $402.5 million balance-sheet debt-obligation figure to the $410.4 million selected indebtedness figure in MD&A, and the terms and dilution implications of the convertible notes.
- Whether operating cash flow improves as demand and working capital normalize, and how much liquidity remains after debt service and planned investment.
- The acquired business’s performance, working-capital adjustment and potential contingent payments of up to $4.0 million.