CHEF - With Risks The Chefs' Warehouse Could Be Worth Much More
2023-03-11 05:51:34 ET
Summary
- The Chefs' Warehouse specializes in exotic or unusual foods.
- Considering the diversification of the business model, the revenue line will most likely be less volatile than that of other competitors.
- In the last annual report, the company noted clearly that it intends to improve operating margins in relation to the costs and the price of its products.
The Chefs' Warehouse, Inc. ( CHEF ) reports a significant number of clients in the United States and internationally, and offers a large list of products. I believe that the business model is significantly diversified. Besides, I am quite optimistic about the omnichannel marketing strategy and the intentions of management with respect to operating income expansion and product growth. I identified several risks, including the total amount of long term debt, regulatory risks, and issues with suppliers; however, I believe that CHEF stock price could be a bit more valued in the market.
The Chefs' Warehouse Reports A Large Number Of Clients And Products, And Operates In Many Jurisdictions
The Chefs' Warehouse is an American company with an international reach level, dedicated to the production of protein foods and specialty foods. Currently, its operations extend to the Middle East, Canada, and the United States. Chefs' Warehouse operates in 40k core locations across its 23 geographic markets, and reports 44 distribution centers.
Source: Quarterly Presentation
The company concentrates its operations on satisfying the specific demand of chefs, who operate in some of the all-you-can-eat restaurants in hotels, private residences, haute cuisine restaurants, and other types of gastronomic establishments.
Source: Quarterly Presentation
The Chefs' Warehouse specializes in exotic or unusual foods. These foods are chocolates, caviar, truffles, specialty meat, and fish. Chefs' Warehouse claims to have a stock of 75K products, supplied by more than 2,000 different suppliers. The company has managed to centralize the distribution and supply activity in the production chain of haute cuisine professionals. Chefs' Warehouse not only sells to clients in the gastronomic field, but also offers its products in retail through its online sales channels.
Source: Quarterly Presentation
Chefs' Warehouse has 700 professionals dedicated exclusively to doing market research and having continuous conversations with its head chefs to keep abreast of their needs and trends. In addition to its direct customers, the customer target proposed by the company is chefs or specialty gastronomic establishments and haute cuisine.
In the same sense, Chefs' Warehouse maintains relationships with suppliers from different parts of the world, among which are large producers of food such as olive oil as well as regional and artisan producers of certain specific ingredients.
Assets
As of December 31, 2022, the company reported cash of $158.800 million, accounts receivable of $260.167 million, and inventories of $245.693 million. Prepaid expenses and other current assets stood at $56.200 million with total current assets close to $720.860 million. Finally, total current assets stand at around $185.728 million, below the current amount of liabilities. Some investors may not appreciate it.
With operating lease rights of use assets of $156.6 million, goodwill of $287.120 million, and intangible assets worth $155.703 million, total assets stand at $1.509 billion, close to 1.5x the total amount of liabilities .
| ASSETS |
| December 30, 2022 |
| Current assets: |
| Cash and cash equivalents |
| $ |
| 158,800 |
| Accounts receivable, net of allowance of $20,733 in 2022 and $20,260 in 2021 |
| 260,167 |
| Inventories, net |
| 245,693 |
| Prepaid expenses and other current assets |
| 56,200 |
| Total current assets |
| 720,860 |
| Property and equipment, net |
| 185,728 |
| Operating lease right-of-use assets |
| 156,629 |
| Goodwill |
| 287,120 |
| Intangible assets, net |
| 155,703 |
| Deferred taxes, net |
| — |
| Other assets |
| 3,256 |
| Total assets |
| $ |
| 1,509,296 |
Source: 10-K
Liabilities
Liabilities include accounts payable worth $163.397 million with accrued liabilities of $54.325 million, short term operating lease liabilities of $19.428 million, and accrued compensation of $34.167 million. Finally, with a current portion of long term debt of $12.428 million, total current liabilities stand at $283.745 million.
The company also reported long term debt of $653.504 million with an operating lease liability of $151.406 million, deferred tax of $6.098 million, and total liabilities of $1.107 billion.
| Current liabilities: |
| December 30, 2022 |
| Accounts payable |
| $ |
| 163,397 |
| Accrued liabilities |
| 54,325 |
| Short-term operating lease liabilities |
| 19,428 |
| Accrued compensation |
| 34,167 |
| Current portion of long-term debt |
| 12,428 |
| Total current liabilities |
| 283,745 |
| Long-term debt, net of current portion |
| 653,504 |
| Operating lease liabilities |
| 151,406 |
| Deferred taxes, net |
| 6,098 |
| Other liabilities and deferred credits |
| 13,034 |
| Total liabilities |
| 1,107,787 |
Source: 10-K
My Assumptions Include Successful Acquisition Of New Customers, More Products, And Operating Margin Improvement
The company is currently executing a growth strategy, supported by the great possibilities offered by the market, and is taking into account the expansion into new international markets and new clients. Considering the state of the balance sheet and the recent cash flow statements reported, I believe that the company will likely be successful.
Source: Quarterly Report
The current corporate strategy is based on increasing the penetration of its current customers, through the offer of new products and considering strategic acquisitions.
Source: Quarterly Presentation
Besides, management expects to expand the client portfolio in the current markets in which it operates, by locating gastronomic establishments that have demand for these services. Finally, in the last annual report, the company noted clearly that it intends to improve operating margins in relation to the costs and the price of its products. In line with these projections, I would like to note that the guidance reported for the full year 2023 includes Adjusted EBITDA close to $180-$190 million and gross profit close to $708 million.
Source: Quarterly Presentation
My Cash Flow Model Implied A Valuation Of $54 Per Share
My cash flow model included a conservative CAPM model with a beta of 1.59, a cost equity of around 18.5%, cost of debt close to 6%-6.4%, and WACC of 11%.
Source: My CAPM Model
My model also included 2033 net income of $593 million accompanied by depreciation and amortization close to $49 million, amortization of intangible assets of $17 million, and provision for allowance for doubtful accounts of -$51.718 million.
I also included 2033 non-cash operating lease expense of $7.094 million, a provision for deferred income tax of $158.896 million, and 2033 amortization of deferred financing fees of -$10.347 million. Finally, I included 2033 stock compensation of $24.109 million and loss on assets disposal in 2033 of -$0.925 million.
Source: My Estimates
I would also expect 2033 changes in accounts receivable of -$170.816 million, changes in inventories of -$325.648 million, and prepaid expenses and other current assets of -$43.630 million. Finally, with changes in accounts payable of $220.208 million and other assets and liabilities of -$15.780 million, the CFO would stand at $452.347 million accompanied by 2033 capex of -$37.285 million and 2033 FCF of $415.062 million.
Source: My Estimates
With a WACC of 11% and an EV/FCF multiple of 13x, the residual terminal value would stand at $5.188 billion, and the enterprise value would be $2.579 billion. If we also assume short term debt of $12.428 million and long term debt of -$653.504 million, the equity valuation would be $2.072 billion, and the fair price would stand at $54 per share.
Source: My Estimates
Competitors
The food services market is highly competitive, in which both small regional producers and distributors of the nature of Chefs' Warehouse participate. Additionally, the market has low barriers to enter, which most investors will likely not appreciate.
Negotiations and contracts with clients are hard work due to the large amount of demand. In any case, the company offers products at reasonable prices, having high quality and great recognition among its customers.
Risks
Chefs' Warehouse depends on a large number of suppliers. Besides, the company has to respect a long list of regulations and deal with many economic factors such as the oil price. Additionally, clients are not obliged to make repetitive purchases, and the company does not seem to have a long list of purchase agreements or recurrent revenue. Most financial advisors running discounted cash flow models will likely not appreciate the lack of recurrent FCF.
In addition, some of the products sold by the company exhibit large variations in their prices, making the business model a bit risky. Making future projections is not that easy.
It is also worth noting that Chefs' Warehouse declares a significant amount of debts, which may lower the options for management. Debt holders may decide to block future acquisitions and growth plans towards new clients and markets.
Conclusion
The Chefs' Warehouse sells to a number of clients internationally, and reports an ample portfolio of products, close to 75K. Considering the diversification of the business model, the revenue line will most likely be less volatile than that of other competitors. I am quite optimistic about the omnichannel marketing strategy implemented by management and its strategy of focusing on product growth and targeting improvement of operating margins. Even considering risks from failed expansion or regulatory risks, I believe that Chefs' Warehouse is undervalued.
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With Risks, The Chefs' Warehouse Could Be Worth Much More