Wealthy diners are still spending on Wagyu beef, stone crab, and other upscale menu items at restaurants even as food prices rise.
Chefs’ Warehouse
caters to this crowd, and that’s good news for the stock.
Chefs’ Warehouse, based in Ridgefield, Conn., distributes a range of specialty food to more than 44,000 restaurants; most are chef-owned and managed, the rest in luxury hotels and country clubs that offer fine-dining services. The company works with 3,000 suppliers and producers in 40 countries, often with exclusive arrangements.
“These guys are distributing really high-end steaks, seafood, olive oils, cheeses, and all sorts of premium products,” says Peter Saleh, an analyst at financial services firm BTIG. “They cater to customers with the top 10% income in the country, where your average restaurant check is $80 to $100, if not more.”
The company, with a market cap of $1.3 billion, grabbed market share in recent years as smaller, regional players struggled with challenging sales and high interest rates. Over the past two years, Chefs’ Warehouse has made a dozen acquisitions, adding $324 million—58% growth—to quarterly sales.
Chefs’ Warehouse has also added more distribution centers to its network, not only in key markets such as California and Florida, but also in states such as Arizona and Texas, with booming restaurant scenes driven by an influx of higher-income tech workers. The company plans to grow distribution capacity by nearly 60% from 2022 to 2026, over half of which has been completed.
The fast expansion has come at a cost: margin compression. Chefs’ Warehouse tends to purchase companies with relatively low profit margins to gain entry to a market. While 85% of its fiscal 2023 sales have a margin of 6.25%, measured by adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, the remaining 15%, mainly from recent acquisitions, has a margin of just 2%, Chief Financial Officer James Leddy said at a conference in January.
Shrinking margins should reverse soon, however. Management said this year that the company will dial back on acquisitions to focus on integrating new purchases and improving profitability. That’s why Todd Brooks, an analyst at investment firm Benchmark, named Chefs’ Warehouse one of his top 2024 picks.
Chefs’ Warehouse still expects organic growth of 4% to 6% for the next couple of years. The company’s free cash flow has been negative over the past three years due to the acquisitions. With those slowing down, the company should see positive free cash flow—about $50 million to $80 million annually—over the next two years, Brooks estimates. This could help lower the company’s net debt-to-Ebitda ratio, which is currently at 3.5 times. The company’s target ratio is 2.5 times to 3 times by 2025.
Chefs’ Warehouse is set to report 2023 fourth-quarter earnings on Feb. 14. Brooks wrote in a January note that management had pointed to strong sales during the holiday season, partially driven by corporate spending on dining out and year-end events. Analysts polled by FactSet expect sales of $910 million, up 15% from last year’s fourth quarter. Operating income is expected to come in at $37 million, 25% year-over-year growth.
Despite the growth, there seems to be a disconnect between the company’s strong fundamentals and its stock price, says BTIG’s Saleh. “Shares are significantly undervalued with 2023 revenue, gross profit, and operating income all tracking to double from 2019 levels, yet shares trade well below prepandemic levels,” he says.
One possible reason: Investors grew concerned about the possibility of softer consumer spending as dining out became more expensive over the past two years. There are signs that diners are starting to order fewer or cheaper items to avoid sticker shock when the bill arrives.
Indeed, the National Restaurant Association’s Restaurant Performance Index, which tracks the health of the U.S. restaurant industry through same-store sales, foot traffic, labor costs, and capital expenditures, has declined since 2021, slightly contracting as of December.
Investors may be averse to Chefs’ Warehouse stock due to an uncertain outlook for restaurants—but wealthy diners are more willing to open their wallets wider. “High-end restaurants have more pricing power than
McDonald’s
and Wendy’s, because their customers have more disposable income,” says Saleh.
The stock dipped as low as $18 this past fall on recession concerns. Shares have rebounded to a recent $33.05. Still, the shares are valued at just nine times enterprise value to estimated 2024 Ebitda. That’s much cheaper than the range between 13 and 18 times over the past five years. The six analysts who cover the stock are bullish, with price targets ranging from $35 to $49, according to FactSet. At the midpoint of $42, the stock would be up more than 25%.
“I don’t think people are doing enough work to try to understand how much this company has grown,” Saleh says.
Once they figure it out, the stock will deliver more gains to investors.
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Write to Evie Liu at [email protected]
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