Many investors looking for ways to play the economic recovery have turned to the beaten down restaurants. The industry has been particularly hard hit during the pandemic, but optimism around reopening have lifted the group in recent weeks.
With valuations for many restaurant stocks hovering around record lows, companies like Brinker International (NYSE:EAT) and Darden Restaurants (NYSE: DRI) are being gobbled up by traders.
But with these stocks approaching their pre-crisis levels, there may be a better way to play the space. Specialty food distributor The Chefs' Warehouse (NASDAQ:CHEF) represents an interesting "back door" approach to investing in the restaurant rebound theme.
Trading around $14 per share, the stock is still a distance away from its pre-crisis peak above $40. With restaurant doors starting to reopen and consumers breathing a sigh of relief for outdoor dining, the company appears to be rebuilding the momentum it had prior to the pandemic.
What Does Chefs' Warehouse Do?
Ridgefield, Connecticut-based Chefs' Warehouse is a family operated business that provides over 34,000 ingredients to chefs. Founded in Manhattan as the Veterans Butter & Egg Company over 30 years ago, it serves restaurants, hotels, caterers, country clubs, and gourmet food stores in the major culinary markets of North America. Its roughly 20,000 customers include some of the world's top chefs, restauranteurs, and culinarians.
Today Chefs' Warehouse operates as a collection of 11 companies including Allen Brothers, Dairyland, and DelMonte Meats, that together make a portfolio of high-quality meat, seafood, dairy, and specialty food products. It has acquired several companies over the years including meat and poultry producer Bassian Farms and online specialty food store Horizon Food Service last year. As the food distribution industry remains fragmented, more acquisitions are likely. As such, Chefs' Warehouse can be considered a roll-up investment strategy.
The company's storefront is straightforward. Backed by its sales and customer service teams, it has a website and a mobile app where customers can place orders. Its technology platform includes integrations with restaurant and hotel back-office and purchasing systems which enables convenient replacement ordering.
How Has Chef's Warehouse Performance Been?
The near-term performance has been severely impacted by the pandemic. With its core restaurant customers closed for the better part of the spring, orders grinded to a halt.
Sales were down 51% in the second quarter to $200.5 million. In addition to its main restaurant business, Chefs' Warehouse has customers in the resort, casino, and cruise line industries. This exposure contributed to a $20.3 million net loss during the quarter.
Amid the pandemic Chefs' Warehouse made a creative pivot towards selling directly to consumers to boost sales. Investments in the new "Shop Like a Chef" platform appear to be paying off. Many consumers were quick to adopt the service because they liked the idea of gaining access to the same ingredients used by popular chefs like Thomas Keller, Missy Robbins, and Jose Andres.
More importantly, the launch of the program has generated increased awareness of the Chefs' Warehouse brand and expanded the company's addressable market. This part of the business won't be going away as economic conditions normalize. Further development of the direct-to-consumer business has the potential to create a diversifying, complementary growth business for the company.
What Will Drive a Recovery at Chef's Warehouse?
Make no mistake. The restaurant business remains the lifeblood of Chefs' Warehouse. Much uncertainty remains around the pace and length of the economic recovery and restaurants are expected to be among the last groups to recover. Customer traffic at restaurants, hotels, and resorts will ultimately have to improve for the company to grow.
There have been signs that a recovery is underway. In June, Chefs' Warehouse managed to generate 60% of its prior year revenue. This marked a significant improvement from the muted activity level of April when it had recouped around 40% of prior year sales. Pending developments around virus cases and the lifting of in-dining restrictions, the company is on pace to at least match its sales figures of 2019 by the end of this year.
Of course, investors want to see growth. That is likely to resume in 2021. Keep in mind, this is a company that has a strong, proven business model that has produced five-year sales and earnings growth rates of 11% and 8%, respectively. Prior to the pandemic it was experiencing solid growth and improving profitability.
The Chefs' Warehouse distribution footprint includes the West Coast, Texas, and Florida which have been hampered by an uptick in COVID-19 cases since reopening. It also includes parts of the Northeast, Mid-Atlantic, and Midwest region where pent-up demand for an out-of-the-home fine dining experience has led to a rebound in the restaurant business.
Meanwhile, many people remain hesitant to return to indoor dining. A portion of this group may never return. But over time, its logical to think that most people will ultimately return to their favorite restaurants and drive increased demand for Chefs' Warehouse steaks, salmon, cheeses, and other fine foods.
So, should investors buy Chefs' Warehouse now or wait for confirmation of normalized business conditions?
Is Chefs' Warehouse Stock a Good Buy?
Citing the uncertainty around the economic recovery, management refrained from offering full year guidance last month. This makes it hard for investors to gauge future performance.
The stock has been largely rangebound since breaking out of its pandemic slump but has shown signs of life in recent days as pandemic related headlines have improved. While it may not be prudent to take a large stake in Chefs' Warehouse here given the high level of uncertainty, nibbling on the stock below $14 may be a good move.
The company's financial health is decent all things considered. In May it issued additional common shares to raise approximately $75 million. This not only bolstered its liquidity but gave it the flexibility to pay down debt and invest in its sales and distribution infrastructure.
The birth of the direct-to-consumer business may be an underappreciated silver lining for Chefs' Warehouse and help drive a better than expected third quarter report on November 4th.
Investors that buy here would be doing so at a time when restaurant industry sentiment is still low. They would be getting a company that is in a good position to return to its historic growth path as the economy strengthens.
Waiting until the table is set makes sense too. But investors that prefer to see more appetizing signs of a healthy restaurant industry, may have to pay a gratuity.
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