The Chefs' Warehouse, Inc. (NASDAQ:CHEF) Q4 2023 Earnings Call Transcript February 14, 2024
The Chefs' Warehouse, Inc. beats earnings expectations. Reported EPS is $0.47, expectations were $0.43. CHEF isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greeting, and welcome to The Chefs' Warehouse Fourth Quarter of 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Aldous, General Counsel, Corporate Secretary and Chief Government Relations Officer. Please go ahead, sir.
Alex Aldous: Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO; and Jim Leddy, our CFO. By now you should have access to our fourth quarter 2023 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we'll be presenting non-GAAP financial measures including, among others historical and estimated EBITDA and adjusted EBITDA as well as both historical and estimated adjusted net income and adjusted earnings per share. These measurements are not calculated in accordance with GAAP and may be calculated differently in similarly titled non-GAAP financial measures used by other companies.
Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance and, therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the SEC website.
Today, we are going to provide a business update and go over our fourth quarter results in detail. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?
Chris Pappas: Thank you, Alex and thank you all for joining our fourth quarter 2023 earnings call. Business activity coming out of September strengthened into the fourth quarter as seasonal customer demand and volume trends progress through November and December to close out 2023. Price inflation continued to moderate and our Chefs' Warehouse teams across our North American and international markets delivered strong organic growth and margin improvement. As we move into 2024, I would like to thank all of our CW teammates for the dedication and passion they have for our mission to discover and deliver the finest specialty foods, fresh produce and center-of-the-plate protein that inspire the culinary creativity and feed the success of our customer and supplier partners, as we strive for excellence and impeccable service.
As a reminder, we are comparing the fourth quarter of 2023, a 13 week fiscal quarter for the fourth quarter of 2022, a 14 week fiscal quarter and as such we will present certain results both as reported and on a prorated 13 week comparison. A few highlights from the fourth quarter on a prorated basis include 11.3% organic growth in net sales, specialty sales were up 11.2% organically over the prior year, which was driven by unique customer growth of approximately 12.4%, placement growth of 6.5% and specialty case growth of 11.3%. Organic pounds in the center-of-the-plate were approximately 8.4% higher than the prior year fourth quarter. Gross profit margins increased approximately 38 basis points. Gross margin in specialty category decreased 76 basis points, as compared to the fourth quarter of 2022, while gross margin in the center-of-the-plate category increased 71 basis points year-over-year.
Specialty gross profit margins were lower primarily due to the addition of Hardie's. Excluding Hardie's, specialty gross profit margin increased approximately 35 basis points versus the prior year quarter. Jim will provide more details on gross profit and margins in a few moments. During the Q4, we completed multiple steps as part of our ongoing focus on harvesting our investments in warehouse and distribution capacity in recent acquisitions. These projects involve both consolidation of distribution center, routes and operations in certain markets as well as further integration of acquired sales teams distribution and cross selling with our existing specialty and protein businesses in key markets across our network. A few highlights are; in Florida, we completed the consolidation of three facilities into our new distribution center located in Opa-Locka.
We now have meat and sea food processing specialty and produce distribution operating under one roof with significant room to grow over the years to come. We initiated operations in our new distribution center located in Southern New Jersey serving the Philadelphia and Pennsylvania market. This facility provides expanded capacity in a region as well as creates additional room for growth in the New York Metro and Mid Atlantic markets. In Dallas and Austin, Texas, we have begun the process of cross selling our specialty and Allen Brothers protein distribution with Hardie's is facilitated by a combined sales force and route consolidation in the initial stages. We have reduced facility related costs in Houston and are working on future distribution plans in the state's largest market.
A farmer harvesting truffles in the countryside, ready to be shipped to customers.
Our expansion in Dubai continues to progress and we anticipate commencing operations out of the additional capacity in the second half of this year. Our consolidation of protein processing in Northern California is on-track to begin a phased-in move starting in the second quarter of 2024 and progressing through the end of the year. For 2024 and beyond, we expect to leverage our expanding infrastructure, further integrate recent acquisitions, while strengthening the balance sheet, focusing on free cash flow generation and delivering our two year capital allocation plan. As we enter this next phase of our growth, we expect Chefs' Warehouse to remain rooted in our DNA as the leading specialty food marketer and distributor to the upscale casual and higher-end dining establishments in the markets we serve.
With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim?
Jim Leddy: Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Our net sales for the quarter ended December 29, 2023, increased approximately 29.3% to $950.5 million from $734.8 million in the fourth quarter of 2022, which represents a prorated 13 week net sales for the fourth quarter of 2022. Net sales on a reported basis, 13 weeks compared to 14 weeks, increased 20.1%. The prorated growth in net sales was a result of an increase in organic sales of 11.3% as well as the contribution of sales from acquisitions, which added approximately 18% to the sales growth for the quarter.
Net inflation was 1.8% in the fourth quarter, consisting of 0.6% inflation in our specialty category and inflation of 3.4% in our center-of-the-plate category versus the prior year quarter. Gross profit increased 31.4% to $228.6 million for the fourth quarter of 2023 versus a prorated $173.9 million for the fourth quarter of 2022. On a reported basis, comparing 13 weeks to 14 weeks, gross profit increased 22%. Gross profit margins increased approximately 38 basis points to 24.1%. As mentioned on our third quarter call, gross profit dollar growth and margin trends improved significantly coming out of the softer summer months. These trends continued as the quarter progressed into the holiday season and our teams across our regions including sales, operations, procurement and all the supporting functions delivered a strong margin performance, while providing the premium quality product and service our customers have come to expect from The Chefs' Warehouse.
Selling, general and administrative expenses increased approximately 23.8% to $190 million for the fourth quarter of 2023 from $153.4 million for the fourth quarter of 2022. The increase was primarily due to higher costs associated with compensation, including benefits, facility costs and distribution costs to support sales growth in the current quarter. On a prorated basis, adjusted operating expenses increased 33% versus the prior year fourth quarter and as a percentage of net sales, adjusted operating expenses were 17.8% for the fourth quarter of 2023 compared to 17.3% for the fourth quarter of 2022. Operating income for the fourth quarter of 2023 was $38.2 million compared to $29.8 million for the fourth quarter of 2022. The increase in operating income was driven primarily by higher gross profit and lower other operating expenses, partially offset by higher selling, general and administrative expenses versus the prior year quarter.
Income tax expense was $10.1 million for the fourth quarter of 2023, compared to $4.3 million expense for the fourth quarter of 2022. Our GAAP net income was $16 million or $0.38 per diluted share for the fourth quarter of 2023, compared to net income of $1.2 million or $0.03 per diluted share for the fourth quarter of 2022. On a non-GAAP basis, we had adjusted EBITDA of $59 million for the fourth quarter of 2023 compared to $50.1 million for the prior year fourth quarter. Adjusted net income was $20.2 million or $0.47 per diluted share for the fourth quarter of 2023, compared to $18.2 million or $0.46 per diluted share for the prior year fourth quarter. Turning to the balance sheet and an update on our liquidity. At the end of the fourth quarter, we had total liquidity of $221.9 million comprised of $49.9 million in cash and $172 million of availability under our ABL facility.
Total net debt was approximately $662.5 million, inclusive of all cash and cash equivalents. And net debt-to-adjusted EBITDA was approximately 3.4x as compared to approximately 3.6x as of the end of third quarter of 2023. Turning to our full year guidance for 2024. Based on the current trends in the business, we are providing our full year financial guidance as follows; we estimate that net sales for the full year of 2024 will be in a range of $3.625 billion to $3.775 billion. Gross profit to be between $865 million and $900 million and adjusted EBITDA to be between be between $205 million and $218 million. Our full year estimated diluted share count is approximately 44.9 million shares. For reporting purposes, we currently expect our senior unsecured convertible notes maturing in 2028 to be dilutive for the full year and accordingly, those shares that could be issued upon conversion of the notes are included in our fully diluted share count.
Thank you. And at this point, we will open it up to questions. Operator?
