The Chefs’ Warehouse, Inc. — Q2 2020 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 26, 2020. The company distributes specialty foods and center-of-the-plate products, primarily to independent restaurants and other foodservice customers. COVID-19 restrictions materially disrupted customer operations and demand.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $200.5 million | $411.4 million | $575.9 million | $768.4 million |
| Gross profit / margin | $47.4 million / 23.7% | $106.5 million / 25.9% | $138.3 million / 24.0% | $196.7 million / 25.6% |
| Operating income (loss) | $(25.4) million | $15.5 million | $(42.4) million | $21.7 million |
| Net income (loss) | $(20.3) million | $7.7 million | $(34.4) million | $8.9 million |
| Diluted EPS | $(0.57) | $0.26 | $(1.05) | $0.30 |
- Q2 sales declined 51.3%; first-half sales declined 25.1%. Acquisitions contributed $26.7 million of Q2 sales and $68.6 million for the first half, while organic sales fell $237.6 million and $261.1 million, respectively.
- Q2 gross margin fell 222 basis points; first-half gross margin fell 157 basis points. Q2 operating expenses were $72.8 million, down 19.9%, but rose to 36.3% of sales from 22.1% as revenue contracted.
- First-half operating cash flow was $47.6 million, versus $21.9 million in 2019. It included $53.6 million of cash generated from working capital, primarily reflecting lower demand. Investing cash use was $67.9 million, including $63.5 million for acquisitions; financing provided $82.0 million.
- At June 26, cash was $201.8 million; working capital excluding cash was $107.8 million. Debt obligations were $403.7 million carrying value, including $397.8 million long-term and $5.9 million current. Aggregate debt principal was reported as $396.4 million. ABL availability was $31.8 million.
Changes, actions and outlook
- Management attributed the sharp sales decline to COVID-19 closures and capacity restrictions. In Q2, organic case count in specialty fell about 68.3%, center-of-the-plate pounds sold fell 51.3%, and specialty unique customers and placements declined 56.3% and 69.1%.
- COVID-19-related charges included estimated incremental bad-debt expense of $15.8 million and inventory obsolescence of $8.8 million in the first half; approximately $5.5 million of the inventory charge was recorded in Q2. The company reported no goodwill or long-lived-asset impairment from its first-quarter tests, but warned further deterioration could trigger future impairment.
- The company expanded direct-to-consumer sales, pursued retail food outlets and shifted purchasing toward higher-demand products. It reported no supplier procurement difficulties to date and implemented salary reductions, furloughs, layoffs and other cost controls.
- It raised $85.9 million net from a May–June common-stock offering and drew $100 million on its ABL facility in March, repaying $60 million. In June, it amended its term loans: $171.2 million was in the 2025 tranche and $31.2 million in the 2022 tranche. The 2025 tranche carries LIBOR plus 5.5% and may mature in June 2024 if specified convertible notes due December 2024 are not refinanced or repaid. The amendment added a minimum-liquidity covenant; the company reported $249.1 million of covenant-defined liquidity and compliance with covenants at quarter-end.
- Fiscal 2020 capital expenditures, excluding acquisitions, were expected to be $10–$12 million, reduced from the original $38–$42 million estimate due to postponed investment. Management believed available cash, working capital and ABL availability would meet operating and other liquidity needs for the next 12 months. No revenue or earnings guidance was provided.
- Acquisitions included Sid Wainer & Son, with approximately $44.1 million purchase consideration, and a New England center-of-the-plate business, with approximately $16.4 million consideration. Sid Wainer contributed $38.6 million of first-half sales and a $5.1 million operating loss; contingent earn-outs are subject to performance targets.
- The first-half effective tax rate was 35.5%. The company recorded an expected $13.1 million tax refund receivable under CARES Act provisions. Interest-rate sensitivity disclosure: a 100-basis-point rate increase would reduce annual after-tax earnings by approximately $1.6 million, other factors held constant.
Investor verification priorities
- Track restaurant reopening, customer volumes and the duration or renewal of capacity restrictions, particularly given the steep organic sales decline.
- Review receivables quality and the adequacy of the allowance after the $15.8 million incremental bad-debt charge, alongside inventory obsolescence estimates.
- Monitor cash generation, ABL availability, covenant liquidity and debt maturities/refinancing requirements; first-half operating cash flow benefited substantially from working-capital changes.
- Assess acquired businesses’ contribution and performance against earn-out targets, especially Sid Wainer’s reported operating loss.
- Revisit goodwill and long-lived-asset valuation assumptions if pandemic impacts or market conditions worsen; the filing notes future impairment remains possible.