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Why The Chefs' Warehouse Stock Was Falling on Tuesday

By Jon Quast – May 12, 2020 at 3:00PM

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Newly offered shares dilute shareholder value, but provide liquidity through the end of 2021.

What happened

Shares of The Chefs' Warehouse (CHEF -0.93%) fell sharply in early trading on Tuesday after the company announced a secondary offering of its common stock. It was down 10% early before recovering later in the trading session. As of 2:30 p.m. EDT, shares were only down 4%.

The Chefs' Warehouse stock has recovered some in recent weeks, but shares are still down substantially in 2020.

CHEF Chart

CHEF data by YCharts

So what

The Chefs' Warehouse supplies food to small restaurants and caterers across North America. These food-service companies have been hit hard by the COVID-19 pandemic, as many dining rooms are closed. The company just reported earnings for the first quarter of 2020, and organic net sales fell 6.6% year over year. Most of the decline came in the last two weeks of the quarter.

The Chefs' Warehouse has $190 million in cash and $53 million untapped on its credit line to weather the storm. However, the company decided to raise fresh funds by offering new shares of common stock. The offering calls for an initial sale of $75 million in stock, with an option for an additional $11.25 million. The pricing is variable, making it hard to know exactly how many shares we're talking about. But at the current price of $14 per share, that would be over 6 million new shares if the option was exercised. 

Considering there were 31 million shares as of April 1, that would be about a 19% increase in the number of shares outstanding. Loss of shareholder value is why this small-cap stock went down today.

A man places his hands on his head as he stares at a red, downward-pointing stock chart.

Image source: Getty Images.

Now what

According to the SEC filing, by offering new shares of common stock, The Chefs' Warehouse will be able to operate in this challenging business environment through the end of 2021. That should be comforting to shareholders, since no one knows how long the impacts from the novel coronavirus will last.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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The Chefs' Warehouse, Inc. Stock Quote
The Chefs' Warehouse, Inc.
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