Chefs’ Warehouse, Inc. — Q1 2023 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2023, compared with thirteen weeks ended March 25, 2022. The company distributes specialty foods and other products to foodservice customers, primarily independent restaurants and fine-dining establishments, in the U.S. and Middle East.
Financial performance
| Metric | Q1 2023 | Prior period | Change |
|---|---|---|---|
| Net sales | $719.6 million | $512.1 million | +40.5% |
| Gross profit / margin | $169.7 million / 23.6% | $117.5 million / 22.9% | +44.4% gross profit; margin +64 bps |
| Operating income | $11.9 million | $6.3 million | +89.9% |
| Interest expense | $10.0 million | $4.4 million | +129.2% |
| Net income | $1.4 million | $1.4 million | Approximately flat |
| Operating cash flow | $(2.3) million | $10.3 million | Decreased $12.5 million |
Net income per diluted share was $0.04 in both periods. SG&A rose 41.8% to $156.1 million and was 21.7% of sales versus 21.5%. Net sales growth comprised $87.9 million of organic growth (17.1%) and $119.7 million from acquisitions (23.4%). Organic case count in specialty products grew about 16.8%; center-of-the-plate pounds sold grew 14.4%. Estimated inflation was 5.5% in specialty and 3.2% in center-of-the-plate categories.
Liquidity, debt and cash flow
At March 31, 2023, cash was $91.7 million, down from $158.8 million at fiscal year-end. Working capital excluding cash was $300.9 million, and $135.8 million was available under the asset-based loan facility. Total debt and other financing obligations were reported as $686.8 million; debt obligations on the balance sheet, net of deferred costs, were $667.6 million. The company had $340.7 million of variable-rate debt and stated that a 100-basis-point rate increase would reduce annual after-tax earnings by about $2.5 million.
Operating cash use reflected a $20.1 million increase in inventories and other working-capital movements; management said inventory purchases were strategically pulled forward and expected inventory levels to normalize during the rest of the year. Investing cash use was $59.6 million, including $50.9 million for acquisitions and $8.7 million of capital expenditures. Financing cash use was $5.1 million.
Changes, outlook and notable items
- Gross margin improved overall, led by a 65-basis-point increase in specialty; center-of-the-plate margin declined 68 basis points, which management attributed to higher inflationary impacts on certain products.
- Interest expense more than doubled, primarily due to higher debt balances, increased variable rates and prior financing activity. The increase offset much of the improvement in operating income.
- Q1 acquisitions included Hardie’s Fresh Foods for approximately $38 million cash, plus potential earn-out consideration of up to $10 million, and two other acquisitions for approximately $14.4 million, plus potential earn-outs of up to $2 million. Acquisitions contributed $20.2 million in sales and $1.8 million in pretax income during the quarter.
- After quarter-end, the company acquired substantially all assets of Greenleaf Produce and Specialty Foods for an initial $80 million, funded partly by a $40 million incremental draw on its asset-based facility. The purchase-price allocation was not yet available.
- Management forecast fiscal 2023 capital expenditures, excluding acquisitions, of approximately $50–$60 million and said existing cash, working capital and facility availability should meet liquidity needs for the next 12 months. No revenue or earnings guidance was provided in the filing.
- Risks highlighted include food, labor, fuel and interest-rate volatility; low margins and the ability to pass through cost increases; supply availability and distribution interruptions; acquisition integration and growth execution; and economic or weather-related impacts in concentrated markets. Ordinary-course legal matters were not expected by management to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether organic volume growth and margin improvement continue as inflation and product mix change, particularly in center-of-the-plate products.
- Whether inventory normalizes and operating cash flow improves after the Q1 working-capital investment.
- Debt service and refinancing exposure, including the 2024 convertible notes, variable-rate borrowings and the effect of further rate increases.
- Integration, purchase accounting and performance of recent acquisitions, including contingent earn-out obligations and the Greenleaf acquisition.
- Whether the planned $50–$60 million capital expenditure range and management’s 12-month liquidity assessment remain appropriate.