Chefs’ Warehouse is Cooking Up a Bargain

The Chefs' Warehouse Inc. NASDAQ: CHEF is a wholesale distributor of high-end specialty food products ranging from meats, seafood, dairy and fresh produce to cakes, truffles and caviar. They also offer kitchen supplies and equipment. Its supply chain includes over 2,500 suppliers and 55,000 stock-keeping units (SKUs). They cater to over 100,000 clients in over 23 markets, including Michelin-rated restaurants, hotels, country clubs, cruise lines, caterers, restaurant groups, and specialty food stores.

The company also provides culinary training and helps clients develop new recipes using the company's ingredients. Its shares have recently hit a 52-week low, presenting a value opportunity to risk-tolerant investors. Competing food distributors Sysco Co. NYSE: SYS and US Foods Holding Co. NASDAQ: USFD have also seen depressed share prices.

Tight Margins Expanding Business

The food business is notorious for thin margins, and even high-end distributors like Chefs' Warehouse are no exception, operating a 23.6% gross margin and earnings before interest and taxes (EBIT) margin of 2.92%. The company has successfully bolstered its online orders by up to 30% to improve its net margins. It's also expanded into some of the wealthiest regions like the Middle East, including Qatar, Oman and the United Arab Emirates, with its Chef Middle East subsidiary servicing more than 3,500 clients with over 350 suppliers and 4,500 SKUs.

Strong Growth Weak Profits

On August 2, 2023, Chefs Warehouse released its fiscal second-quarter 2023 results for the quarter ending June 2023. The Company reported a profit of 35 cents per share, missing consensus analyst estimates of 47 cents per share by 12 cents per share. GAAP net income was $9.9 million shares or 25 cents per diluted share. Revenues rose 36.1% year-over-year (YoY) to $881.8 million, beating consensus analyst estimates for $827.62 million. The company continues to expand its capacity through recent acquisitions since the pandemic.

In-Line Full-Year 2023 Guidance

Chefs' Warehouse issued in-line guidance for full-year 2023 with revenues expected between $3.25 billion to $3.28 billion. Gross profit is expected between $774 million to $797 million. Adjusted EBITDA is expected between $199 million to $207 million.

CEO Insights

Chefs' Warehouse CEO Chris Pappas commented, "The integration over time of acquired companies, brands and the talent we have added and continue to add across our regions and markets; the cross-selling strategy combined with various levels of operational synergies we employ to drive acquired adjusted EBITDA margin higher over time; generating operating leverage as we grow organically into the significant capacity creation we have invested in the last few years and we expect to continue to add to key markets."

Analyst Actions

On August 28, 2023, BTIG called CHEF its top small/mid-cap pick with a $48 price target. On September 25, 2023, UBS initiated coverage of Chefs' Warehouse with a Buy rating and a $37 price target. Analyst Mark Caden noted that the company has been finding ways to boost wallet share with existing clients by scaling up new categories like produce by acquiring Hardie's & Greenleaf. The $37 price target is based on 10X EV/EBITDA multiple after factoring in 8.5% sales growth and 6% EBITDA margin.

Chefs' Warehouse analyst ratings and price targets are at MarketBeat. Chefs' Warehouse peers and competitor stocks can be found with the MarketBeat stock screener.

Daily Descending Triangle Breakdown

The daily candlestick chart on CHEF illustrates the aftermath of the descending triangle breakdown. After shares broke down through the $26.94 flat-bottom trendline, CHEF sold off with only three green candles out of 19 days to reach a new 52-weekly low of $17.56 by October 13, 2023. However, the rebound off the lows formed a daily market structure low (MSL) trigger at $19.10. The daily relative strength index (RSI) has been extremely oversold, trading beneath the oversold 30-band level since its breakdown under the $26.94 triangle bottom for 19 consecutive days. Pullback supports are at $18.20, $17.56, $16.45 and $15.75.