Description

Summary

The Chefs’ Warehouse, Inc. (NASDAQ: CHEF) (“CHEF” or the “Company”), which is headquartered in Ridgefield, Connecticut, distributes a wide range of specialty food products to more than 44,000 restaurants across the United States, Canada, and the Middle East.  We believe that the Company has attractive end markets in specialty food distribution and a leading market position serving premier independent restaurant customers, and that with a prudent corporate growth plan and improving efficiencies, CHEF can achieve its long-stated goal of having 7% adj. EBITDA margins. As a result of those actions, we believe that CHEF could be worth approximately $84 / share (~130%+ upside).

Business Overview

The Chefs’ Warehouse’s business is the wholesale distribution of specialty food, which it defines as “gourmet foods and ingredients that are of the highest grade, quality or style as measured by their uniqueness, exotic origin or particular processing method.” The Company operates primarily in the United States and its primary public competitors are Sysco Corporation (NYSE: SYY), US Foods Holding Corp. (NYSE: USFD), and Performance Food Group Company (NYSE: PFGC).

CHEF’s management believes that the restaurant wholesale food market is approximately $212bn and that there are 15,000, mostly smaller, distribution companies serving that market. The niche that the Company is targeting is the top 35% of independent high-end restaurants, which management believes is a $29bn market. CHEF differentiates itself through its deep relationships with 3,000 of the world’s finest boutique suppliers and artisanal producers, who collectively provide 70,000 SKUs, and an extensively trained sales force to build and strengthen high-touch relationships with well-known chefs.

CHEF is more focused on their targeted independent restaurant niche than its larger public peers and has greater scale and financial resources than their smaller, non-public competitors. The Company has historically grown through acquisition, rolling up smaller and weaker competitors to gain entry into new markets. Given that these weaker peers have lower margins, it should be beneficial to buy them and increase their margins as they’re successfully integrated into CHEF’s system, growing the top and bottom lines. We believe CHEF has meaningful potential margin upside it can achieve from recent acquisitions. 

Valuation

We believe that recently announced board changes will help drive improved financial performance at CHEF. As a part of the board changes, an Operational & Financial Performance Task Force is being formed and a consulting firm is being retained to help unlock financial performance. The table below outlines the upside we see in the stock. To be very conservative, we assume the margin goal is not reached until 2028, resulting in a fair value of $84 (using the current capital structure and giving no credit for cash flow between now and 2028).

Catalyst

Improving EBITDA margins to 7% by 2028