CHEF - The Chefs' Warehouse

[Homestead31]

definitely a pretty severe move on no real news that i'm aware of.

 

as for SYY, yes i think it is likely related in some way - one theory is that if SYY is able to go through with the planned merger, they will likely have to sell off a few things, and people may have been assuming that CHEF would be able to pick up some assets on the cheap.  if the merger doesn't happen (SYY announced it was delayed) then CHEF wouldn't be able to pick up those assets.

 

more than that, i think this may have just been some tax related selling. alot of the top holders established their positions in Q1 at much higher prices.  i figured this would get smoked into year end as people try to harvest those losses, but with low volume and a few likely sellers maybe someone just chose to jump the gun today. 

 

personally i added on the weakness.

[Homestead31]

SYY specifically mentioned Manhattan as an area where they are taking market share.  New York is CHEF's biggest geography.

 

There are alot of restaurants and NYC, and most of them are more mid-market which is SYY's sweet spot rather than high end which is CHEF's sweet spot.  Additionally, there are a ton of food distributor options in NYC.  In sum, it is possible that SYY gained market share while only having a minimal impact on CHEF.  unfortunately it is too early to tell for sure right now. however, the reason CHEF was cheap to begin with is b/c they are spending to grow outside of NYC.  in other words, NYC is less important to what CHEF will look like in a year or 2 then how important NYC is to historical CHEF.

 

For those willing to look out a year or 3 i think this is very cheap.

[LC]

Spoke with another friend in this industry, they own one of the largest pizzeria distributors in the NYC area. Their customers prefer them over Sysco because they are more flexible and can easily arrange that day or next day delivery. With Sysco they would have to work within the Sysco system, it is harder and more expensive for them (in terms of time lost). Seems like a classic area where customer service takes precedence.

 

I don't really have a dog in this. I don't think there are any competitive advantages in this biz. I don't buy the claim that Chef Warehouse has a moat due to the variety of specialized product it offers. I think this is more of a roll-up thing, they go around buying routes and slashing expenses.

[KCLarkin]

SYY specifically mentioned Manhattan as an area where they are taking market share.  New York is CHEF's biggest geography.

 

There are alot of restaurants and NYC, and most of them are more mid-market which is SYY's sweet spot rather than high end which is CHEF's sweet spot.  Additionally, there are a ton of food distributor options in NYC.  In sum, it is possible that SYY gained market share while only having a minimal impact on CHEF.  unfortunately it is too early to tell for sure right now. however, the reason CHEF was cheap to begin with is b/c they are spending to grow outside of NYC.  in other words, NYC is less important to what CHEF will look like in a year or 2 then how important NYC is to historical CHEF.

 

For those willing to look out a year or 3 i think this is very cheap.

 

Yeah, I saw that. But they also said that the southwest and california were strong but Northeast was weak. I wasn't sure how to reconcile those two statements. And if they are taking share in NYC, why do we assume it is from CHEF? That comment doesn't really justify a double-digit drop in CHEF.

 

SYY also said they are continuing to struggle with high inflation. It could be that investors assume CHEF is going to have another bad quarter because they can't pass on center-of-plate inflation.

 

[Homestead31]

LC - I agree it is difficult to say there are any real "lasting" competitive advantages.  after all, there are essentially no barriers to entry here.  however, i do think there are real benefits to scale, and while they are still small next to the big boys SYY and US Foods, they are big next to the hundreds of little guys out there like your friend with the pizza business.  there is nothing stopping your friend or anyone else from growing except for time and money.

 

however, i think it is important to recognize the benefits of scale here - scale makes you more attractive to restaurants because they can order more of their SKUs from one place making it easier to keep the books etc, and scale makes you more attractive to producers because you have a wider distribution network.  scale also gives you economies in the form of lower back end costs like being able to spread the cost of a warehouse and trucks over more end users. This is all less important for simple businesses like pizza shops than it is for high end "foodie" restaurants that pride themselves on the quality of their ingredients and their ever-changing menu.  it is also worth noting that CHEF is known for their customer service and ability to match orders on short notice.

 

KCLarkin - agree that it is likely short term minded traders thinking about the quarter rather than the future and the "normalized" operating earnings power of the company.  that has been the case for months now as investors have headed for the exits on no real weakening of the company's long term ability to generate returns.

[Guest Schwab711]

How much would it cost to take over CHEF as the leader of high-end? What would SYY need to overtake them?

[KCLarkin]

How much would it cost to take over CHEF as the leader of high-end? What would SYY need to overtake them?

 

I don't think SYY is their most likely direct rival. SYY is actually rationalizing their SKUs. They are trying to cut costs by offering fewer products. Taking on CHEF would require the opposite strategy.

[Ross812]

How much would it cost to take over CHEF as the leader of high-end? What would SYY need to overtake them?

 

I don't think SYY is their most likely direct rival. SYY is actually rationalizing their SKUs. They are trying to cut costs by offering fewer products. Taking on CHEF would require the opposite strategy.

 

This is UPS versus a courier service. Not the same thing and not really competing.

 

Syy may want to buy them at some point. I'm not sure at what size they would become interested if at all. They made an offer to Bidvest for 4B a few years ago for their food service business.

[Guest Schwab711]

How much would it cost to take over CHEF as the leader of high-end? What would SYY need to overtake them?

 

I don't think SYY is their most likely direct rival. SYY is actually rationalizing their SKUs. They are trying to cut costs by offering fewer products. Taking on CHEF would require the opposite strategy.

 

This is UPS versus a courier service. Not the same thing and not really competing.

 

Syy may want to buy them at some point. I'm not sure at what size they would become interested if at all. They made an offer to Bidvest for 4B a few years ago for their food service business.

 

I didn't actually mean SYY specifically, just using them as a placeholder for some arbitrary entity. So to re-phrase, how much would I need to overtake CHEF starting from scratch (think blank-check roll-up corps or something)? There are some businesses that have excellent returns but the market cap is higher than than what it would cost a new entrant to get to that point. These companies are at risk. There are other companies, like FICO in my opinion, that it would take billions more than the market cap just to make a dent in the industry.

[Ross812]

Earnings out:

 

http://investors.chefswarehouse.com/releasedetail.cfm?ReleaseID=880797

[KCLarkin]

If you look at their guidance over time, it is quite depressing. They are consistently revising downward.

[AzCactus]

If (and I know it's a big if) they achieve their goals in 2015 and especially 2016, CHEF may well be a long term purchase. 

[Guest roark33]

Chef can grow to the sky, but if they can't earn any money on their revenues, what's the point.  Perhaps they are taking market share by offering a better customer service and more diverse product selection at a similar price. But with slim margins, if they are not pricing their products to make a profit, then market share doesn't really matter.

[KCLarkin]

Chef can grow to the sky, but if they can't earn any money on their revenues, what's the point.  Perhaps they are taking market share by offering a better customer service and more diverse product selection at a similar price. But with slim margins, if they are not pricing their products to make a profit, then market share doesn't really matter.

 

They think they can get 7% EBITDA margins on $1B+ in sales. With their current EV/EBITDA multiple, that would be almost a double from here.

 

So this is really a bet on margins reverting back to 7% in the next 2 or 3 years.

 

 

[Ross812]

Chef can grow to the sky, but if they can't earn any money on their revenues, what's the point.  Perhaps they are taking market share by offering a better customer service and more diverse product selection at a similar price. But with slim margins, if they are not pricing their products to make a profit, then market share doesn't really matter.

 

Margin compression is mainly due to the center of plate integration and inflation. Their protein acquisitions have been difficult for them to get a handle on pricing. They went from only buying finished products to trade, to adding a segment that is essentially a factory. The commodity (meat) has been inflating and they are having a hard time passing it on. The trend will reverse, but this is introducing cyclical profits into a business that didn't operate that way before. Their goal is to integrate the CoP options with their software to update pricing more proactively. Even if this doesn't work they will just see margin swings as commodity prices fluctuate. Analysts don't like margin swings, hence Chef goes on sale and will get rocket up in price when margins suddenly improve.   

 

Even if their CoP offerings continue to drag on margins, they reported that CoP increases their consumer relationship roughly 3x for side items at high margins. This is why management is excited about CoP. It increases their runway. Margins should trend higher as peripheral offerings gain traction though they will appear to fluctuate up and down with commodity (meat) prices. 

 

Keep in mind they are expensing the Bronx and Chicago facility at 4M right now. This will come of in '15 and is worth about 15c a share. Considering no growth, this is trading at 19x right now for a company growing organically at 10% and easily another 10% from acquisitions. 

 

 

 

 

[KCLarkin]

Considering no growth, this is trading at 19x right now for a company growing organically at 10% and easily another 10% from acquisitions. 

 

I was very happy with the organic growth this quarter but I believe inflation was approx half of this. The Bronx and Chicago facilities should give a nice bump to organic growth.

[Homestead31]

Good article in the WSJ today about beef prices coming down.  Beef prices are at a blow off top as ranchers have been holding back cattle and thus reducing supply in order to rebuild the herd.  Consumers are pushing back and reducing demand due to the high prices, further indicating a peak. 

 

this pending mean reversion combined with the assorted infrastructure projects that CHEF has been working on should combine to really turn the ship in 2015.

[KCLarkin]

Yes, 2015 is shaping up really well. I just need to find some more cash.

[Homestead31]

There is another article in the WSJ today about beef.  This one focuses on the decline in exports for assorted reasons.  The key take away is that less foreign demand will lead to lower domestic prices.  That is great for the business, but for the stock what is more important is that the media seems to really be taking an interest in the "beef relief" story.

[KCLarkin]

There is another article in the WSJ today about beef.  This one focuses on the decline in exports for assorted reasons.  The key take away is that less foreign demand will lead to lower domestic prices.  That is great for the business, but for the stock what is more important is that the media seems to really be taking an interest in the "beef relief" story.

 

CHEF, the stock, also benefits from the discretionary income boost from the gasoline "tax cut". Also, since CHEF is 100% North American based, it benefits from the strong domestic growth / weak global growth environment.

[KCLarkin]

CHEF just announced a major Center of Plate acquisition in San Francisco:

http://investors.chefswarehouse.com/releasedetail.cfm?ReleaseID=890685

 

They also quietly issued preliminary 2015 guidance:

http://investors.chefswarehouse.com/releasedetail.cfm?ReleaseID=890319

 

On a preliminary basis, the Company expects its full year 2015 results, including the transaction, to be in the following ranges:

 

Net sales between $1.0 billion and $1.1 billion

Adjusted EBITDA between $68.3 million and $72.0 million

Net income per diluted share between $0.57 and $0.66

Modified pro forma net income per diluted share between $0.70 and $0.80

This guidance is based on an effective tax rate of approximately 41.0% and fully diluted shares of approximately 28.0 million shares.

[Guest Schwab711]

Considering no growth, this is trading at 19x right now for a company growing organically at 10% and easily another 10% from acquisitions. 

 

I was very happy with the organic growth this quarter but I believe inflation was approx half of this. The Bronx and Chicago facilities should give a nice bump to organic growth.

 

If the thesis is this company is high quality then 10% growth at 19x P/E will be definiton provide returns of less than 10% over time. Why not look into M/V, FICO, or MCO/MHFI which have similar valuations and growth prospects but with significantly less execution risk (and in my opinion, longer runways for 10% growth)?

 

Also, look at the ELDO thread. It's a water bottle company (similar to industry) with much better margins, similar ROIC, better operating leverage, and in my opinion, a safer business with a longer runway.

 

I admit I don't understand the interest in whole sale frozen food company. There seems to be a clear cap on the business size. I might have missed it but what is the current market share in NYC? What is the industry market share distribution for NYC? How many cities would CHEF realistically be interested in expanding to and would give them non-trivial cash flow?

[KCLarkin]

If the thesis is this company is high quality then 10% growth at 19x P/E will be definiton provide returns of less than 10% over time.

 

CHEF is growing revenue at 25% per year.

[Guest Schwab711]

If the thesis is this company is high quality then 10% growth at 19x P/E will be definiton provide returns of less than 10% over time.

 

CHEF is growing revenue at 25% per year.

 

What is your expected 10 year earnings growth rate?

[Ross812]

If the thesis is this company is high quality then 10% growth at 19x P/E will be definiton provide returns of less than 10% over time.

 

CHEF is growing revenue at 25% per year.

 

What is your expected 10 year earnings growth rate?

 

I would expect CHEF to easily maintain an average growth rate of 20% for 4-5 years leveling off to 10-12% LT. That puts earnings around $2.50 then before tapering off. I think 10% organic is stable, but it becomes harder for acquisitions to add to the bottom line as they increase in size.

 

They are in NYC, DC, LA and expanding into Chicago. The foodie movement is huge:http://www.thrillist.com/eat/nation/best-us-cities-for-food-best-food-cities-in-america

 

This is not a frozen food distributor. Read up on their products and fulfillment rate. For an above average restaurant, a great distributor can have a huge impact on their business. Keep in mind these restaurants are making high margins on this food and its not available from the local grocery or Sysco type distributors.