Chefs' Warehouse, Inc. — Q3 2018 Form 10-Q
Business and period: Specialty foodservice distributor serving customers primarily in the United States and Canada. The quarter was the 13 weeks ended September 28, 2018; year-to-date results cover 39 weeks. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $361.5 | $325.1 | $1,050.6 | $944.4 |
| Gross profit / margin | $92.0 / 25.4% | $80.9 / 24.9% | $264.8 / 25.2% | $237.4 / 25.1% |
| Operating income / margin | $10.3 / 2.8% | $10.5 / 3.2% | $31.0 / 2.9% | $25.8 / 2.7% |
| Interest expense | $4.7 | $5.6 | $15.0 | $17.4 |
| Net income | $4.2 | $2.9 | $11.5 | $4.9 |
| Diluted EPS | $0.14 | $0.11 | $0.40 | $0.19 |
Quarterly revenue increased 11.2%; management attributed 4.0 percentage points to organic growth and the remainder primarily to Fells Point and other acquisitions. Year-to-date revenue also rose 11.2%, with 4.5 percentage points from organic growth. Q3 operating income edged down despite higher sales and gross profit, as operating expenses rose 16.1% and included a $1.8 million non-cash Fells Point earn-out fair-value charge. Year-to-date operating income increased 20.1%. The lower effective tax rate—25.7% for Q3 and 27.5% year to date, versus 41.7% and 41.6%—primarily reflected the Tax Act.
Cash, debt and liquidity
- Cash was $49.9 million at September 28, 2018, versus $41.5 million at December 29, 2017. Current assets were $318.2 million and current liabilities $117.4 million.
- 39-week operating cash flow was $33.5 million, up from $23.2 million. Investing used $21.3 million, including $9.4 million of capital expenditures and $11.9 million for acquisitions; financing used $3.8 million.
- Total debt obligations were $280.2 million, versus $317.8 million at year-end 2017. The company had $239.7 million outstanding on its term loan and $47.1 million on its ABL facility. A $36.75 million subordinated note balance plus accrued interest converted into 1,246,272 shares in July.
- The ABL facility was increased from $75 million to $150 million. At quarter-end, $87.1 million was available to borrow, with $15.8 million reserved for letters of credit. The company reported compliance with debt covenants.
- Term-loan and ABL interest rates were 6.3% and 3.5%, respectively. Management estimated a 100-basis-point rate increase would reduce annual after-tax earnings by approximately $2.1 million.
Changes, outlook and risks
- Q3 gross margin improved 56 basis points, while operating margin fell 40 basis points year over year. Management cited center-of-the-plate deflation as a contributor to gross-margin improvement; specialty-category gross margin declined 32 basis points in Q3.
- Management expected fiscal 2018 capital expenditures, excluding acquisitions, of $16 million to $18 million for facility expansions and headquarters renovations. It provided no specific revenue or earnings guidance in the supplied filing text.
- The company paid $11.4 million for small strategic acquisitions during the first 39 weeks. On October 2, 2018, after quarter-end, it paid $3.0 million to Fells Point's former owners for achieving an earn-out target.
- Management expects the new lease accounting standard to materially increase reported right-of-use assets and lease liabilities; adoption was planned using the optional transition method. ERP implementation was expected to continue through fiscal 2019.
- Key exposures include economic conditions and restaurant discretionary spending, food-cost inflation or deflation and the ability to pass costs through, product mix, supply interruptions, weather, competition, and acquisition integration. The filing reported ordinary-course legal proceedings, with no material accrual and no expected material adverse effect; it identified no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether organic sales growth and customer/case-count gains persist independently of acquisition contributions.
- Whether gross-margin improvement can offset operating-cost growth and the effect of product mix and food-price changes.
- Debt reduction, ABL borrowing-base availability, covenant headroom and sensitivity to variable interest rates.
- The expected cost and timing of ERP rollout, facility projects and lease-standard adoption.
- The assumptions behind the Fells Point earn-out valuation and subsequent $3.0 million payment, and the effect of share conversion on dilution.
- Management cautioned that interim results may not indicate full-year performance, in part because of seasonality in the direct-to-consumer business.