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Why The Chefs' Warehouse Stock Jumped on Wednesday

By John Ballard – Jul 28, 2021 at 11:18AM

Key Points

  • The company annihilated earnings estimates in the second quarter.
  • The strong performance in gross margin reflects tremendous consumer demand.
  • Sales momentum continued through the end of June, which bodes well for near-term growth.

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People are eating out again, and that's great news for The Chefs' Warehouse.

What happened

The Chefs' Warehouse (CHEF -0.34%) surprised investors with significant outperformance over analysts' expectations in the second quarter. Sales surged 111% year over year, but the performance on the bottom line was the standout. Adjusted earnings per share came in at $0.04, significantly exceeding the Street's estimate for a loss of $0.32.

The stock was up 13.5% as of 10:48 a.m. EDT on Wednesday. That puts the one-year trailing return at 149%, significantly outperforming restaurant stocks.

CHEF Chart

CHEF data by YCharts

So what

The strong beat in sales and earnings is a relief, after the consumer price index report for June showed rising inflation for food costs. The stock had sold off sharply after that report, but nothing reverses investor sentiment better than great business results. 

Gross profit increased by 120.8% year over year, which shows the business successfully passing higher costs on to customers. The Chefs' Warehouse reported estimated inflation of 6.4% in Q1, but that accelerated to 10.6% in Q2. 

People eating outside at a restaurant.

Image source: Getty Images.

Now what

While the company is not issuing guidance due to uncertainty of the recovery, management hinted that momentum could carry over to the next quarter.

"Business activity and revenue grew steadily throughout the second quarter as existing and new customer openings increased and COVID-related restrictions eased across many key markets," CEO Chris Pappas said. Pappas added that sales toward the end of June 2021 were trending in line with 2019 sales, inclusive of recent acquisitions. 

Investors should continue to monitor the pace of inflation, as The Chefs' Warehouse operates with minimal profit margin and could be sensitive to sharp rises in food costs. Obviously, it's not at a level to hurt the business right now.

The Chefs' Warehouse said it benefited from capacity growth at restaurants and the initial stages of menu expansion, all of which could point to more growth in the near term. 

John Ballard 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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