Del Monte Integration Issues Catch Up With Chefs' Warehouse in Q2

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Chefs' Warehouse (CHEF -0.94%) disappointed investors with its bottom-line figure in the first quarter, despite posting strong sales growth. But the specialty food services provider served up another helping after the market closed on Tuesday, when it reported second-quarter results. Did Chefs' Warehouse shareholders like what they saw this time around? Here are the highlights.

Chefs' Warehouse results: The raw numbers

YOY: YEAR OVER YEAR. DATA SOURCE: CHEFS' WAREHOUSE.

What happened with Chefs' Warehouse this quarter

You can take those second-quarter GAAP losses with a grain of salt. The negative year-over-year comparisons stem largely from repaying $13 million of debt earlier than initially planned. On an adjusted pro forma basis, the company posted earnings per diluted share of $0.15. That's still down from the pro forma earnings per diluted share of $0.21 reported in the same quarter last year, but it's better than a loss. However, investors were expecting better results.

Organic growth accounted for $6.3 million of Chefs' Warehouse's revenue increase in the second quarter. The Del Monte acquisition kicked in another $4.0 million in year-over-year sales growth. Case counts in the second quarter increased 5.9%. The number of unique customers and and placements in the company's core specialty business grew 5.3% and 5.4%, respectively.

One area of disappointment for Chefs' Warehouse related to its profit margins in the second quarter. Gross profit margin declined to 24.7% from 25.5% in the prior-year period. Difficulties with passing through higher beef prices to customers and continued Del Monte integration issues contributed in particular to holding back protein division margins.

What management had to say

Chefs' Warehouse Chairman and CEO Chris Pappas pointed out several challenges facing his company:

Our core specialty business remained reasonably strong throughout the second quarter, despite a softening restaurant backdrop, with organic growth of 4.6%. Our customers have continued to navigate well through this challenging consumer environment. The Del Monte system conversion proved more challenging than we originally anticipated, which significantly impacted margins during the quarter. However, the conversion of the Del Monte meat facilities is substantially complete and while it will take longer than originally expected to return protein margins to historic levels, we believe we have a great business that we are very excited about and a very solid infrastructure for continued growth.

Looking forward

The company updated its full-year 2016 guidance with both good news and bad news. The good news was that Chefs' Warehouse now expects 2016 net sales will be between $1.18 billion and $1.20 billion. That's up from the $1.15 billion to $1.18 billion guidance provided at the end of the first quarter.

However, the bad news is that Chefs' Warehouse anticipates a net loss for the year between $1 million and $3 million. Three months ago, the company projected full-year 2016 earnings between $20.5 million and $22 million. Adjusted earnings per diluted share for the year are now expected to be between $0.38 and $0.46, down from the $0.77-to-$0.83 range given in the first-quarter earnings report.

The biggest challenge for Chefs' Warehouse appears to be with the Del Monte integration. Issues related to this integration really hurt during the second quarter. Investors will want to keep their eyes open for the company's improvement on this front through the remainder of 2016 and into 2017.