The Chefs’ Warehouse, Inc. (NASDAQ:CHEF) is a specialty food distributor. The company has a solid history of revenue growth, but operates with low profit margins. The stock is fairly expensive, so I’m on the sidelines.
Chefs’ Warehouse has produced solid revenue growth since listing in 2011. The company operates profitably, but its margins are fairly low. The profit margin is currently 1.5% with a return on equity of 7.5%. Chefs’ Warehouse operates with moderate debt, with its total liabilities representing 58% of its total asset value. This has dropped from 78% since listing.
Chefs’ Warehouse 2020 forward P/E multiple is 34.3x with a stock price of $41 and its trailing P/E multiple is 56.1x. The company’s book value multiple is 3.9x.
The chart below visually shows the company’s revenue and earnings trend over the last decade along with the next two years of consensus forecasts.
Chefs’ data by Morningstar
As the above chart shows, the company’s revenue has steadily increased since listing in 2011 and the forecasts show this trend continuing through to 2020. The company’s earnings have trended higher, but they broadly declined from 2012 until 2016 before recovering. The company’s earnings growth is expected to continue into 2020.
Since listing, the company’s revenue has increased at an average rate of 20% per year and its earnings have increased at an average rate of 6.3% per year. The forecast are for revenue growth of 7% and earnings growth of 12% for 2020.
The Chefs’ Warehouse is a specialty food distributor focused on serving restaurants, hotels, caterers and gourmet stores in the United States and Canada. The company listed on the NASDAQ stock exchange in 2011 and has produced solid revenue growth from a combination of acquisitions and organic growth.
Chefs’ acquisitions include:
- Qzina Specialty Foods acquired in 2013. Qzina is a supplier of gourmet chocolate, dessert and pastry products for pastry professionals.
- Del Monte Meat Company acquired in 2015. Del Monte is a distributor of specialty food products.
- Fells Point Wholesale Meats acquired in 2017. Fells Point is a manufacturer and distributor of specialty meats products in North America.
- BK Specialty Foods acquired in 2018. BK is a distributor of specialty food products.
- Bassian Farms, Inc. acquired in February 2019. Bassian Farms is a distributor of specialty food products in North America.
One thing that stands out with Chefs’ Warehouse’s acquisitions is that the company is totally focused on its objective – which is to acquire specialty food companies.
Chefs’ Warehouse’s acquisitions have increased its product offerings and this will only help as its customers are largely professional chefs. While the company’s revenue growth is largely due its acquisitions, the company also generates organic growth.
A quick look at the company’s website gives a clear picture of their demographics. This is not a retail company, even though they do have an online selection and ordering system.
The website is clearly aimed at chefs (as the ordering is per case rather than per item). I do like the way the company has used the online ordering system layout that is commonly seen with websites selling retail products. Online selling has a proven track record for retail customers so I think this would work equally as well with chefs. The online ordering system is highly visual and is a quick way for chefs to order what they need.
Chris Pappas – Founder, Chairman & CEO of Chefs’ Warehouse commented in the company’s latest earnings call:
Approximately 18% of all specialty orders were placed in our e-commerce platforms.
At present the online orders has reached around a fifth of the total orders, but I think this will continue to increase over time. As the company operates with low profit margins, I think that online ordering is essential for Chefs’ Warehouse and in the future I think that the company’s profit margins will likely improve.
To further its e-commerce capabilities, the company has produced an App for chefs to place their orders. The App contains the company’s full menu and I think this would be especially popular with the younger chefs. The App allows chefs to place orders from their phone without having to go to the office and wait for a desktop to boot up.
Restaurant Spending Trend
The dollar amount spent eating at restaurants by Americans is increasing at round four times the growth in the population and increasing more than twice the inflation rate.
Data taken statista.com on the amount of money spent on restaurants by Americans reveals that $573 billion was spent in 2008 which increased to $799 billion in 2017. This is an increase of 3.8% per year over the ten year period. Over the same period the American population increased 0.8% per year from 304.1 million in 2008 to 325.7 in 2017. The inflation rate over the same period averaged 1.47%.
It seems Americans are dining out more and this trend looks like it will continue. This trend benefits Chefs’ Warehouse as an increasing trend in dining out means that restaurants need to keep increasing the amount of food ordered.
Chefs’ Warehouse has a history of strong growth with its revenue increasing at 20% per year and its earnings increasing at an average rate of 6.3% per year since listing in 2011.
The earnings are expected to increase 12% which gives a forward PEG (PE divided by the earnings growth rate) of 2.9 with a 2020 P/E multiple of 34.3x.
I think the stock is fairly expensive as its forward PEG of 2.9 is above the 1.5 to 2.5 range that is typical for growth stocks.
As an active investor I personally like to determine some likely price targets. This gives me a feel for how high the stock price could go in the short term and how soon it could get there.
Chefs’ Warehouse chart by StockCharts.com
Over the last decade the company’s stock price initially traded higher to peak at the end of 2013. The stock price then traded back down to below its IPO price of $15 and bottomed in 2016. The stock then surged higher and pulled back late in 2018 before rallying again this year.
The stock gained around 250% with the strong rally from 2017 to 2018. If this strength were to repeat with this year’s rally (which had a low of $30), the stock could potentially reach $75 within a year or two. However, more realistically I think that the stock will continue to rally at a more modest rate (as the 2017-2018 rally was really just a catch up rally due the company’s poor earnings performance during the period 2012 to 2016).
Chefs’ earnings are expected to continue growing and the company’s earnings growth has been on track since 2017. Over the longer term I think that the stock price will continue working its way higher. However, if the company’s’ earnings growth stalls again in the future, then I would expect its stock price to decline again like it did during 2012 to 2016.
Chefs’ Warehouse has a solid track record of revenue growth and is focused on acquiring company’s that complement its business of providing specialty foods. The company’s online ordering system is based on retail systems and has reached 18% of the company’s orders. The company also provides an App with a full menu of their products. American spending on restaurants is increasing at more than twice the inflation rate.
The stock is fairly expensive with a forward PEG of 2.9 and a forward P/E of 34.3x. The company’s earnings did slump from 2012 to 2016 and its stock price declined through that period. The company’s earnings have shown solid growth since 2016, but the stock price would likely decline again if future earnings fall again.
While I think that Chefs’ Warehouse would make a sound long-term investment, I think the stock is a little expensive, so I’m on the sidelines.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.