Image: Chefs' Warehouse.
The trend toward greater awareness of the food we eat has led to a huge rise in demand for specialty food items, both to cater to different tastes, and to accommodate those with a wide variety of dietary restrictions and health needs. Restaurants that want to serve their customers well need the best ingredients they can find, and Chefs' Warehouse (CHEF 0.09%) provides many of the specialty items that are in high demand.
Coming into Thursday afternoon's second-quarter financial report, Chefs' Warehouse investors hoped that the company could continue its impressive track record of growth, and the food distributor's results largely gave investors a tasty mouthful of good news. Let's take a closer look at how Chefs' Warehouse fared, and whether it can keep up its growth.
Chefs' Warehouse caters to investors and clients
The second-quarter results for Chefs' Warehouse showed strength on multiple fronts. Sales soared nearly 33%, to $213.1 million, with most of the revenue gains coming from the integration of Del Monte Meat Company into its business. Nevertheless, the company saw organic growth of about 6%, and on the earnings front, modified pro forma earnings of $0.21 per share were up 17% from year-ago levels, and met the consensus estimate among investors.
Looking more closely at Chefs' Warehouse's results, the success of the company's acquisition strategy showed up clearly in the company's revenue figures. Chefs' Warehouse attributed about $57 million of its sales growth to its acquisition of Del Monte Meat and Euro Gourmet during the past year. Unique customer counts rose by 8%, and case counts rose at a 5.6% clip for the quarter. Food-cost inflation eased to 3.3%, with lower prices in cheese and dairy offsetting higher prices for chocolate and certain proteins.
Chefs' Warehouse has also found ways to become more efficient. The company boosted its gross profit margins by about eight-tenths of a percentage point, attributing much of the gains to improved operating performance in its Allen Brothers subsidiary. Transaction-related costs pushed up operating expenses, and higher costs of labor offset reduced fuel prices.
CEO Chris Pappas seemed content with Chefs' Warehouse's results, noting that, "the second quarter was in line with our expectations." In addition, Pappas pointed to its expansion efforts, saying that "we are pleased to be fully operational in our new Bronx, Chicago, and Las Vegas facilities, and look forward to opening our new San Francisco facility by the end of 2015."
What's next for Chefs' Warehouse?
Unfortunately, Chefs' Warehouse felt it necessary to rein in some of its past guidance regarding the remainder of the year. Although the food distributor had seen improving margins in its protein businesses, non-core customers have imposed greater margin pressure than it had anticipated. As a result, Chefs' Warehouse lowered its earnings projections for the full 2015 year, cutting $0.02 to $0.04 off its previous range for adjusted earnings per share, and offering a new range of $0.67 to $0.74 per share. The company still expects sales to come in between $1 billion and $1.1 billion.
One thing that investors need to keep an eye on is Chefs' Warehouse's debt levels. During the past year, the company's long-term debt has more than doubled, to $305 million. That doesn't represent a huge amount of leverage, but it nevertheless exposes Chefs' Warehouse to changing conditions in the credit market. If interest rates start to rise, then Chefs' Warehouse will eventually need either to get that debt paid off, or face potentially higher financing costs as a result.
Chefs' Warehouse shareholders initially reacted negatively to the news, sending the stock down about 4% in the first hour of after-market trading following the announcement. In order to regain investor confidence, the specialty food distributor will need to prove that its gloomy guidance for the rest of 2015 will give way to longer-term gains as it continues to build out its business. Once that happens, investors should be able to celebrate better future results in style.
