Laughing Water Capital presentation on The Chefs Warehouse, Inc (CHEF) from the ValueX Vail, June 2015.
Investment Basics
- Easy To Understand
- Under-appreciated Moat
- Competitive Advantages
- Strong Normalized FCF Generation
- Fragmented Industry
- Opportunity for Reinvestment
- Long Runway for Growth
- Incentivized Management
- Misunderstood Risks
- Temporary Problems
Chefs Warehouse Description
- Founded in 1985 as an importer of European cheeses to NYC by 25 year old Christopher Pappas, who mortgaged his Father’s house to start the business in the garage
- Focused on the highest end of the restaurant market –“chef driven”
- IPO’din 2011 with $400M in revenue
- Expecting $1B+ revenue in 2015 (~28% CAGR)
- Recent growth has been largely tied to acquisitions, but organic growth has been high single digits per year
- Nations largest specialty food distributor, and more recently, shifting focus to center of plate items
Key Takeaway: CHEF has rapidly grown in a small niche of the food distribution industry.
Industry Basics
- ~ $212 billion US food distribution market
- ~ 16,500 food distributors, vast majority of them are “mom and pop” operations
- Top 3 competitors control 37% of the market
- Spending at “fine dining” establishments represents ~1% of total food spending away from home
Key Takeaway: Chefs Warehouse is a scale player focused on a small niche of a very large and very fragmented food distribution industry
Distribution: Under-appreciated Moat
Key Takeaway: While barriers to entry are non-existent, scale represents a meaningful moat for distributors. Suppliers want access to many end-users, and end-users want access to many suppliers. The result is a 2 sided network, where both sides want to use a middleman due to fragmentation on the other side.
Key Takeaway: Scale leads to purchasing price advantages and operational leverage, which lead to the ability to offer competitive prices, which starts a virtuous cycle as the benefits of scale attract more constituents to the 2 sided network.
Distribution: Low Normalized Cap-Ex
Key Takeaway: Absent one time items and growth spending, cap-ex is virtually non-existent. How much does it cost to maintain a warehouse? Cash can be re-invested for growth of inventory and geographic expansion.
See full PDF below.
