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Chefs' Warehouse Faces More Bottom-Line Pressure

By Dan Caplinger - Feb 21, 2017 at 5:32PM

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The specialty food company expects falling pro-forma earnings in 2017.

The food industry is a tough place to do business, and specialty food distributor Chefs' Warehouse (CHEF 3.13%) has discovered just how hard it can be to serve restaurants and grocery stores in a way that delivers on its core values, while also being as profitable as possible. In recent quarters, Chefs' Warehouse has struggled to keep itself growing, and efforts to boost its business have required short-term hits to its bottom line.

Coming into Tuesday's fourth-quarter financial report, Chefs' Warehouse investors were prepared for more earnings weakness, but the company's guidance for 2017 still held some troubling predictions. Let's take a closer look at Chefs' Warehouse to see how it did, and what it expects in 2017 and beyond.

Kitchen with extensive tools and equipment.

Image source: Getty Images.

Chefs' Warehouse hits another speed bump

Chefs' Warehouse's fourth-quarter results were actually fairly strong compared to what most of those following the stock were expecting. Revenue climbed 17%, to $342.9 million, which was quite a bit better than the $336.7 million consensus forecast among investors. However, although GAAP net income climbed by more than a third from year-ago levels, the company's modified pro forma earnings metric produced a year-over-year decline of 33%, to $4.7 million. That worked out to $0.18 per share, which was $0.02 better than most of those following the stock had expected, but still down from last year's $0.26 per-share figure.

Looking more closely at the numbers, most of the gains that Chefs' Warehouse saw came from organic growth. About two-thirds of the rise in the company's revenue, or 11.5 percentage points, came from internal sources, with the rest stemming from Chefs' Warehouse's acquisition of M.T. Food Service in mid-2016. After making adjustments for the extra week in the current year's fiscal quarter, case counts climbed by more than 7%, and unique customers and placements were up 6% to 7%, as well.

However, there were some downward trends that Chefs' Warehouse saw during the quarter. Pounds of protein products sold fell by 2% from year-ago levels. Also, price deflation continued to have an impact on sales, with specialty products seeing a 1.6% price drop, while proteins took a slightly larger 2.1% hit.

Still, Chefs' Warehouse did show some strength in key areas. Gross margin fell slightly, but substantial reductions in operating costs helped push operating margin up by almost a percentage point-and-a-half. However, some of that improvement came from the one-time effect of cutting back estimates on how much Chefs' Warehouse will have to pay as an earn-out on the acquisition of Del Monte.

CEO Chris Pappas was generally satisfied with how Chefs' Warehouse did. "We continued to show very strong and consistent growth in our business during the fourth quarter," Pappas said, and "we also continued to make great progress in our protein businesses as margins improved."

What's next for Chefs' Warehouse?

Chefs' Warehouse remained encouraged by its long-term strategic vision. In Pappas' words, "We will continue to focus on building our specialty business, improving margins and processes in our protein companies, and facilitating cross-sell opportunities between our specialty and protein business units." Consolidating its recent purchases will also be important, and Chefs' Warehouse is also working on a technology-platform upgrade to give customers better online access.

However, not all investors will be satisfied with Chefs' Warehouse's guidance for 2017. The company said that it expects revenue of $1.25 billion to $1.28 billion in sales for the year, which is roughly in line with expectations. However, modified pro forma net income of $0.34 to $0.41 per share would be down from the $0.44 per share in pro forma earnings that Chefs' Warehouse posted in 2016. Investors were not expecting that, instead hoping that 2017 would be a year for at least modest growth in the company's bottom line.

Chefs' Warehouse investors have been hopeful over the past several months, but it's unclear whether today's announcement will give them the encouragement they need to sustain the stock's upward momentum. Chefs' Warehouse needs to move aggressively to take advantage of its current opportunities in order to avoid further disappointment in the long run.

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