CHEF - The Chefs' Warehouse

[muscleman]

P/FCF seems to be reasonable.

I am new to distributors sector. I looked at NXEO first and then CHEF.

CHEF's 2016 Q2 cost of sales 219 M. Inventory 91M. So their days sales of inventory = 91/219*90 = 37

I am quite surprised that their inventory turns every 37 days, given this is a food distributor. Clearly they are not distributing fresh meat. Vegetables and fruits will likely rot in 37 days either. So what do they deliver?

[kab60]

So guidance around ~ 56m adj. Ebitda less ~ 16m interest expense and 8-12m maintenance capex? And then there's taxes.

[muscleman]

So guidance around ~ 56m adj. Ebitda less ~ 16m interest expense and 8-12m maintenance capex? And then there's taxes.

 

Where did  you find the EBITDA guidance? I googled and only found revenue and income guidance.

 

Looking at last year's 10-K, from the cash flow statement, from operating income of 40M, I add back D&A but not "Provision for allowance for doubtful accounts". Minus 21 M capex, 13M interest expense and 11M tax, I  get about 10 M FCF.

 

The past 3 year's FCF is 10, -1 and 13 M.

I think the primary reason is because revenue went up much less than the operating expense, so operating income stayed almost flat when revenue nearly doubled.

I thought when the network is bigger, there should be some synergy and operating expense should go down. Also the gasoline price is much lower now. So I am not sure what's going on here.

 

 

[kab60]

Latest conference call - their guidance is 53-58,5m FY16.

[Guest roark33]

I just don't see the attraction of this company.  The scale advantages of Sysco, US Foods and Performance Food Group, just don't exist when you are selling into such a niche market. 

 

I can only see this as a buyout target by Sysco or PFG, but it is just so small, I can't imagine them even bothering with it. 

 

Any more insightful thoughts?

 

I just saw the earnings pop up for this coming.  This is from two years ago, I don't think my thoughts have changed at all. 

[kab60]

I just don't see the attraction of this company.  The scale advantages of Sysco, US Foods and Performance Food Group, just don't exist when you are selling into such a niche market. 

 

I can only see this as a buyout target by Sysco or PFG, but it is just so small, I can't imagine them even bothering with it. 

 

Any more insightful thoughts?

 

I just saw the earnings pop up for this coming.  This is from two years ago, I don't think my thoughts have changed at all.

How do you explain the organic growth? According to other writeups and management comments, they target different customers - their margins, number of SKU's and professionel chefs employed as sales people indicates the same I think.

[KCLarkin]

I just don't see the attraction of this company.  The scale advantages of Sysco, US Foods and Performance Food Group, just don't exist when you are selling into such a niche market. 

 

I can only see this as a buyout target by Sysco or PFG, but it is just so small, I can't imagine them even bothering with it. 

 

Any more insightful thoughts?

 

I just saw the earnings pop up for this coming.  This is from two years ago, I don't think my thoughts have changed at all.

 

I still don't think this is an accurate read on CHEF. They have a great core business. The issue is that they've invested heavily in acquiring riskier "center of plate" distributors. The strategy is that Center of Plate offerings drive higher specialty sales. The strategy seems sound but they seem to be paying high prices, using lots of debt, getting mediocre results, and having integration issues. This is a very dangerous situation. Tiny fluctuations in Center of the Plate margins could trip debt covenants.

 

I think the volatility makes this an interesting buy here, but I've sworn off over-levered companies, so I am passing on this opportunity.

 

Also, management has a long history of optimistic guidance at the start of the year inevitably followed by downward revisions.

[kab60]

I just don't see the attraction of this company.  The scale advantages of Sysco, US Foods and Performance Food Group, just don't exist when you are selling into such a niche market. 

 

I can only see this as a buyout target by Sysco or PFG, but it is just so small, I can't imagine them even bothering with it. 

 

Any more insightful thoughts?

 

I just saw the earnings pop up for this coming.  This is from two years ago, I don't think my thoughts have changed at all.

 

I still don't think this is an accurate read on CHEF. They have a great core business. The issue is that they've invested heavily in acquiring riskier "center of plate" distributors. The strategy is that Center of Plate offerings drive higher specialty sales. The strategy seems sound but they seem to be paying high prices, using lots of debt, getting mediocre results, and having integration issues. This is a very dangerous situation. Tiny fluctuations in Center of the Plate margins could trip debt covenants.

 

I think the volatility makes this an interesting buy here, but I've sworn off over-levered companies, so I am passing on this opportunity.

 

Also, management has a long history of optimistic guidance at the start of the year inevitably followed by downward revisions.

It's interesting that they refinanced in June. They must've known that things were shit at Del Monte, but they still got some pretty great rates considering leverage will be at 5-6 times Ebitda FY16 according to their new guidance. Anyone know what their new loan terms look like? Reading Del Montes Glassdoor reviews doesn't give me the impression they're about to turn the corner.

[muscleman]

Regarding Del Monte, I am a bit uncomfortable with this.

 

I think I read in one of the classic investing books about an example of management being greedy and that mentioned transaction bonuses. How can they get a 1 million dollar bonus just by doing a transaction? Doesn't that encourage reckless acquisitions?

 

BTW, does anyone know the relationship between Chris Pappas and John Pappas? They share the same last name.

 

https://www.sec.gov/Archives/edgar/data/1517175/000138713116004736/chef-def14a_051316.htm#a_026

 

Transaction Bonus

 

On April 6, 2015, we successfully completed the acquisition of Del Monte. Upon closing of the transaction, the Compensation Committee awarded special transaction bonuses to our named executive officers in recognition of their efforts in connection with the acquisition. The special transaction bonuses were paid in cash or common stock as follows: Mr. C. Pappas -- $1,000,000 (cash); Mr. J. Pappas -- $350,000 (cash); Mr. Austin -- $500,000 (common stock); Mr. Aldous -- $500,000 (common stock); Ms. Lecouras -- $100,000 (common stock). With respect to the common stock awards for Messrs. Austin and Aldous, though fully vested, one-half of the shares are generally subject to transfer restrictions until the second anniversary of the closing of the acquisition, and the remaining one-half of the shares will be subject to transfer restrictions until the fourth anniversary of the closing of the acquisition, in each case, net of shares withheld for taxes.

[WneverLOSE]

Regarding Del Monte, I am a bit uncomfortable with this.

 

I think I read in one of the classic investing books about an example of management being greedy and that mentioned transaction bonuses. How can they get a 1 million dollar bonus just by doing a transaction? Doesn't that encourage reckless acquisitions?

 

BTW, does anyone know the relationship between Chris Pappas and John Pappas? They share the same last name.

 

https://www.sec.gov/Archives/edgar/data/1517175/000138713116004736/chef-def14a_051316.htm#a_026

 

Transaction Bonus

 

On April 6, 2015, we successfully completed the acquisition of Del Monte. Upon closing of the transaction, the Compensation Committee awarded special transaction bonuses to our named executive officers in recognition of their efforts in connection with the acquisition. The special transaction bonuses were paid in cash or common stock as follows: Mr. C. Pappas -- $1,000,000 (cash); Mr. J. Pappas -- $350,000 (cash); Mr. Austin -- $500,000 (common stock); Mr. Aldous -- $500,000 (common stock); Ms. Lecouras -- $100,000 (common stock). With respect to the common stock awards for Messrs. Austin and Aldous, though fully vested, one-half of the shares are generally subject to transfer restrictions until the second anniversary of the closing of the acquisition, and the remaining one-half of the shares will be subject to transfer restrictions until the fourth anniversary of the closing of the acquisition, in each case, net of shares withheld for taxes.

 

Brothers and co-founders

[DTEJD1997]

Hey all:

 

I briefly looked into CHEF the other day...

 

How is this company even an AVERAGE business?

 

They are losing money.  They are having MAJOR integration issues.  They have too much debt relative to earnings and EBDITA...

 

They have a major problem with management credibility.

 

I am sorry, I just don't see it, and I think the stock is massively overpriced.

[Guest roark33]

The business would not be on anyone's radar if Mecham didn't buy it. 

[WneverLOSE]

Hey all:

 

I briefly looked into CHEF the other day...

 

How is this company even an AVERAGE business?

 

They are losing money.  They are having MAJOR integration issues.  They have too much debt relative to earnings and EBDITA...

 

They have a major problem with management credibility.

 

I am sorry, I just don't see it, and I think the stock is massively overpriced.

 

If everything would look perfect to everybody, smart investors wouldn't be able to invest since the prospect for future returns would be low.

 

saying that, this is definitely not a below average business.

 

first of all they have a network effects in the national and regional level, since they are the largest player in the sector they have the widest array of products and lowest sourcing cost. in the regional level, since they already deliver to say 70% of the chef driven restaurants in the city, they are much more efficient at doing so and therefore can do it at a much lower price.

 

secondly the nature of their business is countercyclical, when the market goes down, they just release inventory and produce cash (while having very low capex requirements). even the dumbest management gonna have to really try hard to run this business to the ground.

 

regarding the supposed integration problems, I don't think I have enough information to have an educated point of view on the subject but unless you can explain your statement I am not going to assign any value to it.

 

They don't lose money and although GAAP accounting may lead you to think that way, they are cash generating.

 

I don't invest in this company yet since the risk reward is not yet there for me.

 

I don't see how is it possible that this "stock" is massively overpriced. I would greatly appreciate to see your future assumptions and calculation.

[DTEJD1997]

Hey all:

 

I briefly looked into CHEF the other day...

 

How is this company even an AVERAGE business?

 

They are losing money.  They are having MAJOR integration issues.  They have too much debt relative to earnings and EBDITA...

 

They have a major problem with management credibility.

 

I am sorry, I just don't see it, and I think the stock is massively overpriced.

 

If everything would look perfect to everybody, smart investors wouldn't be able to invest since the prospect for future returns would be low.

 

saying that, this is definitely not a below average business.

 

first of all they have a network effects in the national and regional level, since they are the largest player in the sector they have the widest array of products and lowest sourcing cost. in the regional level, since they already deliver to say 70% of the chef driven restaurants in the city, they are much more efficient at doing so and therefore can do it at a much lower price.

 

secondly the nature of their business is countercyclical, when the market goes down, they just release inventory and produce cash (while having very low capex requirements). even the dumbest management gonna have to really try hard to run this business to the ground.

 

regarding the supposed integration problems, I don't think I have enough information to have an educated point of view on the subject but unless you can explain your statement I am not going to assign any value to it.

 

They don't lose money and although GAAP accounting may lead you to think that way, they are cash generating.

 

I don't invest in this company yet since the risk reward is not yet there for me.

 

I don't see how is it possible that this "stock" is massively overpriced. I would greatly appreciate to see your future assumptions and calculation.

Hmmm:

 

How figure the ways that CHEF is overpriced....

 

A). They are having problems with their acquisitions that they spent a TON of cash on.

 

B). They are losing money currently, although a lot of that is on one time writedowns.

 

C). EBIDTA to debt is at least 5X !

 

D). This is a low margin business.

 

E). A lot of restaurants are starting to experience severe difficulties, with some even going bankrupt in the past 90 days.  BBRG, FOGO, NDLS, and many others are having financial stress.  If the whole sector is under stress, I don't see how this doesn't affect CHEF in a negative way.

 

F). The Pappas bros. are also involved with LUB.  LUB has been a dumpster fire for a number of years.  Not much going on there.  If the Pappas bros do for CHEF what they did for LUB, you'll be looking at a share price of $10 in the year 2021.

 

But hey, maybe I have no idea at all what I'm talking about!  That is what makes a market.  If you think the stock is MASSIVELY UNDERPRICED, then by all means load up on it.

 

I wish you well.

[Guest Schwab711]

Hey all:

 

I briefly looked into CHEF the other day...

 

How is this company even an AVERAGE business?

 

They are losing money.  They are having MAJOR integration issues.  They have too much debt relative to earnings and EBDITA...

 

They have a major problem with management credibility.

 

I am sorry, I just don't see it, and I think the stock is massively overpriced.

 

If everything would look perfect to everybody, smart investors wouldn't be able to invest since the prospect for future returns would be low.

 

saying that, this is definitely not a below average business.

 

first of all they have a network effects in the national and regional level, since they are the largest player in the sector they have the widest array of products and lowest sourcing cost. in the regional level, since they already deliver to say 70% of the chef driven restaurants in the city, they are much more efficient at doing so and therefore can do it at a much lower price.

 

secondly the nature of their business is countercyclical, when the market goes down, they just release inventory and produce cash (while having very low capex requirements). even the dumbest management gonna have to really try hard to run this business to the ground.

 

regarding the supposed integration problems, I don't think I have enough information to have an educated point of view on the subject but unless you can explain your statement I am not going to assign any value to it.

 

They don't lose money and although GAAP accounting may lead you to think that way, they are cash generating.

 

I don't invest in this company yet since the risk reward is not yet there for me.

 

I don't see how is it possible that this "stock" is massively overpriced. I would greatly appreciate to see your future assumptions and calculation.

 

Did they prepay certain debt purposefully to screw with standard FCF calculations? I see negative cash generation over the last 3.5 years. Last year looks like a fluke.

 

I honestly don't understand what could be special about a specialty food middle-man. It takes nothing to compete in this industry. There might even be negative scale effects after a single truck route (hopefully more than offset by bargaining power). At least that is what I've learned from water delivery.

[KCLarkin]

How figure the ways that CHEF is overpriced....

 

You have made zero reference to CHEF's valuation. The only way your qualitative assertions make any sense is if CHEF is worth $0.

[KCLarkin]

It takes nothing to compete in this industry. There might even be negative scale effects after a single truck route (hopefully more than offset by bargaining power). At least that is what I've learned from water delivery.

 

This should be obvious but there are significant competitive differences between a truck delivering water and a company delivering 35,000 SKUs to 25,000 high end restaurants.

[Guest roark33]

Given COTT's performance over the past two years, I assume you mean the water business is the better one, correct?

[Guest Schwab711]

It takes nothing to compete in this industry. There might even be negative scale effects after a single truck route (hopefully more than offset by bargaining power). At least that is what I've learned from water delivery.

 

This should be obvious but there are significant competitive differences between a truck delivering water and a company delivering 35,000 SKUs to 25,000 high end restaurants.

 

There really isn't. There's certainly a huge difference at the warehouse and with inventory management (especially with perishable SKUs), but delivery is all about route density or vertex/node efficiency. I'm talking about the period between the completion of loading the truck to the truck's return. If there was a perfect comp to CHEF then it would be a lot easier to point to why there is zero moat.

 

Either way, where is all the cash?

 

 

Given COTT's performance over the past two years, I assume you mean the water business is the better one, correct?

 

COTT's stock is probably not a good indication of the water delivery business. I think it's only 25% of their overall revenue (DSS/Total Rev). DSS OI margin is 3.9%. CRVP has 1% OI margins. Purified water delivery is a really terrible biz because a day's worth of water takes up a lot of volume!

[muscleman]

Would anyone want to shed some lights on the transaction bonus?  :)

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/chef-the-chefs'-warehouse/msg273220/#msg273220

 

 

[KCLarkin]

There's certainly a huge difference at the warehouse and with inventory management (especially with perishable SKUs), but delivery is all about route density or vertex/node efficiency. I'm talking about the period between the completion of loading the truck to the truck's return.

 

Sysco can very efficiently deliver you one of their 3 olive oils. But if you want one of the other 200 olive oils offered by CHEF, route density is mostly irrelevant.

 

--

 

Organic growth at the core specialty business was 5% in their dreadful Q2. I'm fairly certain that the high-end restaurant business didn't grow 5%, so CHEF appears to be taking market share.

 

Either way, where is all the cash?

 

Squandered by a series of disastrous acquisitions?

Paid out to management as bonuses for completing the disastrous acquisitions?

Temporarily negative due massive growth investments and acquisition integration?

[KCLarkin]

Would anyone want to shed some lights on the transaction bonus?  :)

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/chef-the-chefs'-warehouse/msg273220/#msg273220

 

IMO, this is absolutely unacceptable, and immediately disqualifies CHEF as an investment.

[Guest Schwab711]

There's certainly a huge difference at the warehouse and with inventory management (especially with perishable SKUs), but delivery is all about route density or vertex/node efficiency. I'm talking about the period between the completion of loading the truck to the truck's return.

 

Sysco can very efficiently deliver you one of their 3 olive oils. But if you want one of the other 200 olive oils offered by CHEF, route density is mostly irrelevant.

 

 

Cost of delivery > Gross profit from sale => Don't deliver

Any delivery route has a high % of fixed costs and a relatively low % of variable costs. That's why route density matters. Doesn't matter if you deliver flowers, dirt, or packages internationally.

 

I assume CHEF benefits from selling specialty olive oil because they are already going to the restaurant or at least near by. The incremental cost of delivery < gross margin.

[KCLarkin]

I assume CHEF benefits from selling specialty olive oil because they are already going to the restaurant or at least near by. The incremental cost of delivery < gross margin.

 

Route density doesn't provide any real competitive advantage to CHEF. There are many small distributors that can economically service high-end restaurants. But they can't economically source, stock, and sell 35,000 SKUs.

 

[GregS]

Would anyone want to shed some lights on the transaction bonus?  :)

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/chef-the-chefs'-warehouse/msg273220/#msg273220

 

IMO, this is absolutely unacceptable, and immediately disqualifies CHEF as an investment.

 

Totally agree, and when you combine it with the issues DTEJD1997 highlights, it might even be a short.

 

the Compensation Committee awarded special transaction bonuses to our named executive officers in recognition of their efforts in connection with the acquisition.

 

I understand that the executives probably worked really hard on the transaction and all, but that literally is their f------ job.  The acquisition improves earnings and ROIC or it doesn't, and that's what they should be compensated for.  Self dealing executives and a captive board.