Chefs’ Warehouse: 50x Earnings And No Recovery In Sight – Seeking Alpha

Restaurant News

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Restaurants have had one of the toughest times during this pandemic and for obvious reasons. Restaurants in many localities around the US were shut down for some time this year and in some cases, either didn’t have the cash to stay the course, or remain closed with the intent of reopening. Either way, capacity at restaurants across the US has moved significantly lower this year.

The restaurants that have been winning are ones that fit the takeaway model more easily, using things like digital ordering with store pickup, delivery, or a drive-thru. Those sorts of things tend to favor cheaper, more convenient dining options, which is exactly the wrong kind of restaurant for our topic here, Chefs’ Warehouse (CHEF).

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CHEF has performed horrendously this year, with the stock losing more than 90% of its value in the space of a few weeks earlier this year. It has rebounded off of the bottom but trades today at just 37% of its pre-crisis high.

CHEF supplies high-end food products to high-end restaurants, which is not a healthy business right now, to be sure. Many of these restaurants have reopened, but in some cases, with limited capacity, limited menus, etc. In other words, CHEF is tied to exactly the wrong sort of restaurant, and its share price is reflecting that reality.

CHEF’s peer group has performed right on par with the S&P 500 in the past year and has actually slightly outperformed YTD. The same cannot be said for CHEF, which has underperformed its peer group by a staggering 67% this year. The market knows CHEF’s customers will struggle to get back to pre-crisis volumes, and I think you should avoid CHEF given there are so many other, more attractive options out there to own.

Recovery will almost certainly be slow

As I mentioned, the recovery for quick service restaurants after the initial shutdowns was swift and powerful; many QSR chains are at or above pre-crisis volumes. High-end restaurants, however, don’t have menus that fit well with delivery/takeaway, as they can charge premiums for the experience of dining. The winners have been those that thrive on convenience; CHEF’s customers focus on everything besides.

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Source: Seeking Alpha

CHEF had been growing nicely in the past few years, boosting revenue by big chunks year after year. That, however, is coming to an end in 2020, and while analysts see a huge increase in revenue next year, even if that comes to fruition, CHEF will still be a long way off from its 2019 total, to the tune of hundreds of millions of dollars. That sort of revenue decline is very difficult for any company to overcome, but that is what CHEF is tasked with.

Interestingly, and pretty telling in my view, is that estimates for revenue continue to move down.

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Source: Seeking Alpha

In other words, there was an initial shock of the pandemic that saw revenue estimates decline in a waterfall fashion. But the strongest businesses have seen upticks in future revenue expectations, whereas if we look here, analysts are still in the process of rightsizing estimates for the out years. That makes sense to me given that prolonged periods of weakness should result in fewer customers for CHEF to peddle its wares to, which will result in a reset lower of the revenue curve, not just a temporary downward shock.

This poses another problem because CHEF’s margins have been weakening over time, as we can see below.

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Source: Seeking Alpha

Gross margins have been pretty steady at around 25% of revenue, which is razor-thin. SG&A costs, however, haven’t been steady and have gradually risen over time, causing operating margin to fall from 6.5% a decade ago to just 3.6% last year. That’s a huge decline in profitability and it means CHEF has to rapidly build revenue in order to tread water with its operating profit dollars.

If we look at the TTM figure all the way to the right, we can see that SG&A costs have moved up another ~3% of revenue due to two weak quarters. This is the kind of deleveraging that lower revenue can cause, and I think CHEF’s profitability has a very long and steep road to recovery. Indeed, I’m not sure when or if we’ll see 3.5% operating margins again, as 2020 is out of contention, and there simply won’t be enough revenue next year to get back to that level. CHEF’s margin problems are being exacerbated by this crisis, and the longer it takes for revenue to recover, the harder it will be.

The bottom line

In case you hadn’t noticed, I don’t see a lot to like here. The company is levered to customers that are struggling and have an extremely tenuous outlook, and CHEF has had its own problems with profitability in the past.

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Source: Seeking Alpha

EPS is going to collapse this year, obviously, but even next year, we can see the margin problems I outlined coming into play. A huge rebound in revenue is only going to produce a very small profit, and that’s if everything goes according to plan.

EPS has the same problem as revenue when it comes to revisions as well, as we can see below.

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Source: Seeking Alpha

This makes sense because I simply don’t see anything to be bullish about. This company had margin problems before the crisis hit, despite the fact that it had years of strong revenue growth. That’s when SG&A costs should be leveraged down, but it simply didn’t happen. Now that revenue is falling and has a very long road to recovery, I think CHEF will struggle mightily with margins and, therefore, EPS. For these reasons, and the fact that the stock is selling for 50 times next year’s earnings, CHEF is a sell.

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.

Source: Thanks https://seekingalpha.com/article/4377844-chefs-warehouse-50x-earnings-and-no-recovery-in-sight