In a year that has been characterized by fear, it is difficult to be a growth investor. Focusing on the long run, time and again, has proven to be the correct approach when the going gets tough in the markets. However, this is easier said than done as short-term market movements often end up forcing investors to make irrational moves that destroy wealth.
For a growth-oriented investor, the difficult yet correct approach is to look for bargains in these volatile markets. More often than not, investors who go against the grain during bear markets end up enjoying lucrative returns in the future, which is a strategy followed by the likes of Warren Buffett (Trades, Portfolio).
This analysis focuses on The Chefs’ Warehouse Inc. (CHEF, Financial), a specialty food ingredient distributor in the U.S. and Canada. The company is expanding outside of North America despite macroeconomic pressures, making it one of the few companies that continues to focus on growth opportunities in international markets. The stock has gained more than 11% this year against the S&P 500's 16% decline. As a result, the company seems well-positioned to maintain this momentum in the future.
The business
The Ridgefield, Connecticut-based company sells about 50,000 products, which include specialty foods and ingredients. Chefs’ Warehouse also provides a high-quality line of custom-cut beef, seafood and hormone-free poultry, as well as food products that the company sells directly to consumers through mail and e-commerce channels. Its customers included independent, menu-driven restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries and chocolatiers, as well as cruise lines, casinos and specialty food stores. As illustrated below, it has a strong presence in many of the key U.S. markets.
Source: Company presentation.
Despite the inflationary environment, the company is recording strong sales thanks to the rising demand for customization and innovation in food menu options and convenience foods.
High-income consumers continue to spend on specialty food products
The Chefs' Warehouse reported net sales of $661.9 million for the third quarter, an increase of 36.7% over the prior-year period, and organic sales growth of 22.2%. An increase in the working population, improved demand for convenience food as well as interest in new menu items are acting as catalysts for growth. High-income consumers continued to spend heavily despite higher prices, which was another growth driver. Additionally, the company's specialty category saw an organic case count increase of about 18.3%, with unique customer and placement growth of 25.9% and 42.1%, respectively.
While the specialty category's gross margin decreased by 133 basis points, the center-of-the-plate category's gross margin increased 238 basis points. Earnings per share increased to 41 cents from 12 cents in the year-ago period. As of Sept. 23, the company had $145.4 million in cash and equivalents.
As illustrated below, Chefs' Warehouse's revenue has trended higher in the last 10 years, except for a blip in pandemic-stricken 2020.
Management noted that, in September, the company saw strong seasonal demand due to a "return from vacations" and a "return to office" trend in the majority of the market. Furthermore, the company observed new openings as well as gradual increases in its hotel, catering and event-related businesses.
Despite macroeconomic uncertainties, the specialty food market has thrived in the U.S., reaching $175 billion in sales in 2021. According to the Specialty Food Industry Report published by the Specialty Food Association, frozen and refrigerated meat, poultry and seafood were the top category in the specialty food market contributing to retail sales in 2021. Cheese and plant-based cheese, chips, pretzels and other snacks were also among the fastest-growing categories. Growth is expected to continue in the coming months, but at a slower pace due to supply chain issues and cost increases. However, changing consumer shopping habits and higher demand for meal customization will result in increased growth in the long run.
Further, Precedence Research projects the global specialty food ingredients market will reach approximately $301.8 billion by 2030, growing at a compound annual rate of 6.92%.
Given this favorable trend, the company boosted its full-year forecast. Chefs' Warehouse raised its net sales forecast for 2022 to a range of $2.45 billion to $2.55 billion, up from a previous range of $2.37 billion to $2.47 billion. The gross profit for the full year is expected to range between $575 million and $599 million, with adjusted Ebitda falling between $145 million and $155 million.
The Chefs' Warehouse enters the Middle East market
The Chefs' Warehouse has significantly grown thanks to strategic acquisitions and has maintained its reputation for quality service and efficiency. On Nov. 1, the company announced the acquisition of specialty food distributor Chef Middle East from Gulf Capital to expand its presence in the fast-growing Middle East region.
For over 25 years, CME has been the premier provider of specialty food products to the Middle East's higher-end restaurants, hotels and catering establishments, with a product portfolio that includes high-quality imported specialty foods, meat and seafood, pastry and bakery goods, beverages and other product lines. The distributor serves over 3,000 customers, ranging from five-star hotels and world-class dining locations to international chains and concept restaurants in the UAE, Qatar and Oman, as well as customers in other locations including South Asia and Africa.
The Chefs' Warehouse anticipates the Middle East region's high-end income demographic, along with Dubai's position as a regional tourism and commercial hub, will attract the type of customers and service model that has sustained it for years. The company also noted that many of its existing customers have opened locations in the region, which provides it with a meaningful opportunity to expand along with its customers. The company expects the acquisition to generate between $160 million and $180 million in annual net sales and $11 million to $14 million in Ebitda in the near term.
Takeaway
The Chefs' Warehouse reported better-than-expected third-quarter earnings and raised its guidance for 2022. With a positive industry outlook and new growth tailwinds, the company could be an attractive opportunity for investors looking for exposure to a fast-growing segment of the food and beverages market.
