Source: The Chefs' Warehouse.
The Chefs' Warehouse (CHEF -1.08%) announced earnings for the third quarter of 2014 on Wednesday, and while sales are growing nicely, falling profit margins are putting a big drag on overall performance. Let's look at the latest report from The Chefs' Warehouse and the main considerations for investors.
Sweet sales
Net sales during the quarter ended on Sept. 26 grew 22% to $208.1 million, from $170.6 million in the same quarter last year. The number in came in above Wall Street analysts' forecasts of $203.6 million for the quarter.
The Allen Brothers acquisition in late 2013 accounted for approximately $19.5 million in net sales growth for the quarter. Organic growth contributed $18 million, or 10.5%, to annual growth. Unit case growth during the quarter was 5.1%, unique customer growth was 10%, and placement growth was 5.6%.
Inflation during the quarter was notoriously high, at 5.6%, which is having a negative impact on profit margins. Management said in the press release that inflation was particularly elevated in the dairy, cheese, and protein categories.
Bitter margins
Gross margin declined 143 basis points to 24.4% of sales, from 25.8% in the third quarter of 2013. This decrease was due mostly to inflation, a shift in product mix toward more protein items, and disappointing performance from Allen Brothers.
Operating expenses were 20% of sales during the last quarter, a decline versus 20.2% of revenues in the third quarter of 2013. Still, this wasn't enough to buffer the contraction in gross margins, so operating margin fell to 4.3% of revenues from 5.3% in the same period last year.
GAAP net income was $4.2 million, roughly in line with the third quarter of 2014. However, the average diluted share count increased from 21.1 million to 24.8 million. Because of a higher share count, GAAP earnings per share fell from $0.20 to $0.17.
Adjusted net income was $3.7 million during the quarter, a decline versus $4.4 million in adjusted net income during the same quarter last year. Adjusted earnings per share fell from $0.21 to $0.15, coming in below Wall Street's forecast of $0.17 per share.
Moving forward
Chairman and CEO Chris Pappas highlighted in the press release the healthy performance in case unit growth, while admitting that the negative impact from inflation and weaker-than-expected results from Allen Brothers hurt The Chefs' Warehouse during the quarter:
During the third quarter we experienced improvement in our core specialty business, especially in case growth, which was up 5.1% over the third quarter of 2013. While we are pleased with the performance of our core businesses, our results were negatively affected by virtually unprecedented inflation and the performance of our Allen Brothers business unit.
For the fourth quarter of 2014, management is expecting revenues in the range of $825 million to $835 million. Wall Street is on average forecasting sales of $835.4 million during the coming quarter, so the company's guidance doesn't look particularly exciting in comparison with analysts' expectations.
Management expects adjusted earnings per share of between $0.60 and $0.65 for the last quarter of the year, while Wall Street analysts are on average forecasting earnings per share of $0.65.
The Chefs' Warehouse is down by more than 42% year to date, as investors are getting increasingly concerned over margin pressure. While it's good to see the company producing healthy sales growth, the latest earnings report will hardly alleviate those worries.
