Business context and reporting period
The Chefs’ Warehouse, Inc. (Nasdaq: CHEF) distributes specialty foods, produce, proteins and other food products to foodservice customers, primarily independent restaurants and other culinary businesses, across the United States, Canada and the Middle East. This Form 10-K covers the fiscal year ended December 30, 2022, which contained 53 weeks; the prior fiscal year contained 52 weeks. The filing does not provide separate fourth-quarter results.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $2,613.4 million | $1,745.8 million |
| Gross profit / margin | $618.6 million / 23.7% | $390.5 million / 22.4% |
| Operating income | $85.7 million | $10.8 million |
| Net income (loss) | $27.8 million | $(4.9) million |
| Diluted earnings (loss) per share | $0.73 | $(0.13) |
| Cash from (used in) operating activities | $23.1 million | $(19.9) million |
Gross margin was 23.7%; operating margin was approximately 3.3% and net margin approximately 1.1%. Selling, general and administrative expenses were $518.2 million, or 19.8% of sales, versus 21.7% in FY2021. Interest expense was $43.8 million, up from $17.6 million.
Cash and cash equivalents were $158.8 million at year-end. Working capital excluding cash was $278.3 million, and reported availability under the asset-based loan facility (ABL) was $135.8 million. Debt obligations had a $665.9 million carrying value, including $674.7 million of principal before unamortized costs and premiums; the balance-sheet current portion was $12.4 million. Capital expenditures were $45.8 million. Operating cash flow less capital expenditures was approximately negative $22.7 million, before acquisition spending.
Changes versus the prior comparable period
- Sales rose 49.7%. Management attributed $561.6 million, or 32.2%, of growth to organic growth and $306.1 million, or 17.5%, to acquisitions; the additional fiscal week contributed approximately 2.0% to annual sales growth.
- Organic specialty case volume increased approximately 27.6%, specialty unique customers 26.8%, specialty placements 35.7%, and center-of-the-plate pounds sold 16.1%. Management estimated inflation of 15.0% in specialty and 8.0% in center-of-the-plate products.
- Gross margin expanded approximately 130 basis points overall. Specialty-category margin fell 50 basis points amid higher inflation; center-of-the-plate margin increased 181 basis points, benefiting from reopened favorable-margin markets.
- Operating income and net income improved substantially, while interest expense increased due to higher debt and variable rates and a $14.1 million loss on debt extinguishment associated with refinancing.
- Operating cash flow improved from a $19.9 million use to $23.1 million provided, but rapid growth increased investment in receivables and inventory. Investing cash outflow was $232.0 million, including $186.2 million for acquisitions and $45.8 million for capital expenditures.
Outlook, commentary and risks
Management expects current cash, working capital and ABL availability to be sufficient for working capital, capital expenditures, debt service and other requirements over the next 12 months. It estimated FY2023 capital expenditures, excluding acquisitions, at $50 million to $60 million. The filing provides no quantified sales or earnings guidance. Management’s stated priorities include organic customer and product growth, operating efficiencies, technology and facility investment, and selective acquisitions.
In November 2022, the company acquired Chef Middle East for approximately $108.7 million in cash, with up to $10 million of additional earn-out consideration subject to gross-profit targets. Acquisitions completed during FY2022 contributed $245.7 million of sales and a $15.4 million pretax loss, as reported for the acquired businesses. The purchase-price allocation for Chef Middle East was still being finalized. A further California distributor acquisition closed in January 2023 for $10 million cash, with up to $2 million in potential earn-out consideration.
Key risks include the company’s substantial debt and exposure to variable interest rates, refinancing and covenant requirements; low margins and difficulty passing on food, labor, fuel and other cost increases; customer credit and collection risk; supply disruptions and volatile protein prices; economic sensitivity of restaurant customers; acquisition integration and execution; and food-safety, regulatory, labor and cybersecurity risks. New York generated approximately 18.8% of FY2022 sales, creating geographic concentration. The company reported no pending or threatened legal proceeding expected to have a material adverse effect and no off-balance-sheet arrangements. It does not expect to pay dividends in the foreseeable future.
FY2022 included $8.5 million of non-cash expense from changes in contingent earn-out fair values. The company also disclosed a $21.25 million expected federal tax refund receivable and a $1.418 million employee-retention tax-credit receivable; IRS processing had been delayed, and the timing of receipt was uncertain. The independent auditor issued an unqualified opinion on the financial statements and internal controls; the audit identified debt-transaction accounting as a critical audit matter.
Important facts for investors to verify
- Whether organic volume, pricing and customer growth remain durable as inflation moderates and the extra fiscal week does not recur.
- Acquisition performance and integration, particularly Chef Middle East, including final purchase accounting, earn-out exposure and acquired-business losses.
- Debt maturities, variable-rate exposure, covenant headroom and potential dilution from convertible notes; the filing reports $341.5 million of floating-rate debt and estimates a 100-basis-point rate increase would reduce after-tax earnings by about $2.5 million annually.
- Cash conversion and working-capital needs, including collections, inventory growth, capital spending and the delayed tax refunds.
- Margin trends by product category and the effect of food, labor, fuel and other cost pressures on pricing and profitability.