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Chefs Warehouse: Financial turnaround is imminent (NASDAQ: CHEF)

Ibrahim Akcengiz

Investment thesis

The Chefs Warehouse, Inc. (NASDAQ: CHIEF) is a family-owned distributor of specialty foods. The company published a solid quarterly result, a sign of the financial recovery. I think the business could show strong growth in fiscal year 2022, which can offer strong returns to its investors.

About Chefs Warehouse

The company is a distributor of specialty foods and center-of-the-plate products in the United States and Canada, headquartered in Ridgefield, Connecticut. The company is dedicated to meeting the unique demands of chefs who own and operate some of the finest menu-based independent restaurants, fine dining restaurants, country clubs, hotels and caterers. The company’s specialty food line includes approximately 50,000 stocking units, including artisan charcuterie, fine cheeses, rare oils and vinegars, truffles, caviar, chocolate and baked goods. Custom-cut beef, shellfish, hormone-free chicken, and foods like cooking oils, butter, eggs, milk, and flour are all included in center-of-the-plate offerings.

Thanks to a postal and e-commerce infrastructure, it markets its basic products directly to consumers. The company generates 50.2% of its turnover in the center of the plate segment. Dried products contribute 13.7%, Pastry shop contribute 10.2%Cheeses and Charcuterie contribute 8.2%, Dairy products and eggs contribute 4.6%, products contribute 6.9%, oils and vinegars contribute 4.1%, and kitchen supplies contribute 2.1%.

Chef's income segment

Revenue segment (annual report)

The company aims to increase its customer base by improving its product portfolio, the efficiency of the sales team and by selecting the company to be acquired. The company wants to expand its customer base in the existing market by collaborating with existing restaurants. The company is also exploring opportunities in new markets with acquisitions. It has made twenty-three acquisitions since the IPO. The company aims to capitalize on existing infrastructure and expand its presence in new markets. All these growth strategies are proof that the company will continue the current growth phase.

Solid financial growth

CHEF recently announced the financial results of its Q2 2022 ended June 24, 2022. The company reported net sales of $648.1 million in the second quarter of 2022, an increase of 53.2% from $423.0 million in the second quarter of 2021. Organic growth of the company increased by $152.3 million, or 36.0%, over the prior year. same quarter. Earlier acquisitions contributed 17.2% or $72.9 million to sales growth last quarter. In the company’s specialty segment, the number of organic cases increased by approximately 34.8%, driven by growth in unique clients and placements of 35.9% and 54.6%, respectively, compared to the corresponding quarter of last year. Compared to the prior year quarter, organic book sales in the company’s center-of-the-table category increased nearly 14.2%.

Compared to the same quarter last year, estimated inflation in the company’s specialty categories was 16.4%, and in its center-of-the-plate categories was 10.9%. The company’s gross profit margin increased by 140 basis points and stood at 24.1% compared to the gross profit margin of 22.7% in Q2 2021. The increase in gross profit margin is the average weighted by a decrease of 70 basis points in the specialized category and an increase of 230 basis points in the center. – the category of the base compared to the quarter of the previous year. Selling, general and administrative expenses increased from $90.4 million in Q2 2021 to $124.5 million in Q2 2022, an increase of approximately 37.8%. For the last quarter, the surge was primarily driven by cost increases in compensation and benefits. The company reported operating profit of $27.6 million, a dramatic increase of 487.2% from $4.7 million in the same quarter a year earlier. The increase was driven by higher gross margin, which shows the increased operational efficiency of the business. It reported net income of $16.9 million or diluted EPS of $0.42, representing a significant growth of 1436.3% from diluted EPS of $1.1 million or 0.03 $.

After the good results, the company has raised its annual outlook. The company estimates that net sales for the full year of fiscal 2022 could be between $2.375 billion and $2.475 billion. The company estimates that gross profit could reach $553.0 to $576.0 million with a gross profit margin of 23.28%, and adjusted EBITDA could range from $135.0 to $145.0 million. I believe the company’s estimates are correct and that it will return to a profitable business after two consecutive weak financial years.

What is the main risk facing CHEF?

Inflation

CHEF usually operates with a low profit margin to make the price of the product attractive to consumers. Rising inflation has strained profit margins due to rising production costs. The supply chain disruption added to the negative effects of rising inflation. The company faces a risk of tight profit margin due to rising product supply costs. It has managed this risk by maintaining a good range of products and having a larger number of suppliers to limit exposure to the risk of supply shortfalls.

Technical analysis and fundamental valuation

Technical Analysis Chart

Technical Analysis Chart (Investing.com)

CHEF has positive technical indicators. The stock price has a strong level of support at its 100-day weighted moving average (WMA). The stock is testing its 50-day WMA level and is expected to break through. We will see further momentum once it breaks through its 50-day WMA level. The stock has a strong support zone at the $36 levels, and there is limited downside from current price levels according to WMA analysis. The RSI indicator suggests that the stock price is in the buy territory. The stock is currently consolidating in the 40-60 zone. There is no significant divergence in the RSI, but the current trend reflects a buying opportunity on the stock.

CHEF released strong quarterly results with considerable improvement. It has seen a 21% increase in share price over the past year. The company supported the market volatility and managed to perform extremely well when it came to the stock price. CHEF is currently trading at a price of $36.11. It trades at a P/E multiple of 28.90x with FY2022 EPS estimates of $1.31. The company has a strong buy rating by Seeking Alpha and is ranked 2nd out of 7 companies in the food retail industry. This reflects the company’s growth potential and strong financial performance. I think the company has tremendous upside potential in the stock price.

Conclusion

CHEF showed considerable improvement in quarterly results, beating estimates by significant margins. It has substantial growth prospects in the near future. The company has a strong buy rating by Seeking Alpha based on strong growth and momentum. It faces inflation risk, but the growth outlook offers a favorable risk-reward profile. The company is trading at an attractive valuation. I assign a buy recommendation after analyzing all these factors.