The Chefs' Warehouse, Inc. (CHEF) Earnings Call Transcript & Summary

Greetings, and welcome to the Chefs' Warehouse Second Quarter 2026 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.

Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman and CEO; and James Leddy, our CFO. By now, you should have access to our second quarter 2026 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures, including, among others, historical and estimated EBITDA and adjusted EBITDA as well as historical adjusted net income, adjusted earnings per share, adjusted operating expenses, adjusted operating expenses as a percentage of net sales and as a percentage of gross profit net debt, net debt leverage and free cash flow. These measures 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 and second quarter 2026 earnings presentation. 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 second quarter results in detail. We are also providing an update to our 5-year financial targets. For a portion of our discussion this morning, we will refer to a few slides posted on the Chefs' Warehouse website under the Investor Relations section titled Second Quarter 2026 Earnings Presentation. Please note that these slides are disclosed at this time for illustration purposes only. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris?

Thank you, Alex, and thank you all for joining our second quarter 2026 earnings call. Today, Jim and I will begin our remarks with an update on second quarter results and provide an increase to our full year 2026 financial guidance, followed by an update to our 5-year financial targets, taking our previously provided 2028 targets out to 2030. Second quarter 2026 displayed strong growth in both revenue and profitability. Our regional Acepts warehouse teams continue to deliver excellent execution across markets and product categories. We are driving market share gains via growth in product penetration, case volume and unique customers, combined with ongoing improvement in operational efficiency to provide customers with the highest quality ingredients and flexible on-time delivery. Momentum continued into July, and we currently expect double-digit top line growth to start the third quarter. Our Middle East operations are improving gradually as they enter the seasonally slower summer period. During May and June, our business located their open -- operated at approximately 94% of prior year, and this trend has remained fairly steady through recent weeks. I would like to thank all our teams from sales, procurement and pricing, operations and all the supporting functions for their dedication to serving our customers and our communities as we go to market as the Chefs' Warehouse family of brands and companies in North America and the Middle East. With that, please refer to Slide 3 of the presentation. A few highlights from the second quarter include organic net sales grew 12.2%. Organic specialty sales were up 10% over the prior year, which was driven primarily by unique placement growth of 7.2% and specialty case growth of 6% and price inflation. Unique customers grew 3.6% year-over-year. Reported unique customer growth was impacted partially by the conflict in the Middle East. Excluding this impact, second quarter unique customer growth was approximately 4.9%. Pounds in center-of-the-plate were approximately 8.8% higher than the prior year second quarter. Gross profit margins increased approximately 49 basis points. Gross margin in the specialty category increased approximately 47 basis points as compared to the second quarter of 2025, while gross margin in the center-of-the-plate category increased approximately 75 basis points year-over-year. Jim will provide more detail on gross profit and margins in a few moments. For an update on certain of our operating metrics, including continued improvement in year-over-year gross profit per route and adjusted EBITDA per employee, please refer to the slides provided in the appendix of our second quarter 2026 earnings presentation. 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?

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. Please refer to Slide 4 of the presentation. Our net sales for the quarter ended June 26, 2026, increased approximately 12.9% to $1.169 billion from $1.035 billion in the second quarter of 2025. The growth in net sales was a result of an increase in organic sales of approximately 12.2% as well as the contribution of sales from acquisitions, which added approximately 0.7% to sales growth for the quarter. Net inflation was 4.9% in the second quarter, consisting of 4% inflation in our specialty category and 6.4% inflation in our center-of-the-plate category versus the prior year quarter. Gross profit increased 15.2% to $292.9 million for the second quarter of 2026 versus $254.3 million for the second quarter of 2025. Gross profit margins increased approximately 49 basis points to 25.1%. Selling, general and administrative expenses increased approximately 9.6% to $234.2 million for the second quarter of 2026 from $213.8 million for the second quarter of 2025. The increase was primarily due to higher costs associated with compensation and benefits, facilities and distribution to support sales growth as well as higher depreciation driven by facility and fleet investments. Adjusted operating expenses increased 8.4% versus the prior year second quarter. And as a percentage of net sales, adjusted operating expenses were 17.5% for the second quarter of 2026. Operating income for the second quarter of 2026 was $58.6 million compared to $40.2 million for the second quarter of 2025. The increase in operating income was driven primarily by higher gross profit, partially offset by higher selling, general and administrative expenses. Our GAAP net income was $33.8 million or $0.76 per diluted share for the second quarter of 2026 compared to net income of $21.2 million or $0.49 per diluted share for the second quarter of 2025. On a non-GAAP basis, we had adjusted EBITDA of $88.1 million for the second quarter of 2026 compared to $65.4 million for the prior year second quarter. Adjusted net income was $34.7 million or $0.78 per diluted share for the second quarter of 2026 compared to $22.5 million or $0.52 per diluted share for the prior year second quarter. Turning to the balance sheet and an update on our liquidity. Please refer to Slide #5. At the end of the second quarter, we had total liquidity of $321.1 million, comprised of $135.5 million in cash and $185.6 million of availability under our ABL facility. During the second quarter, we repaid $30 million of our ABL debt, reducing the outstanding drawn balance to $70 million. As of June 26, 2026, total net debt was approximately $478.5 million, inclusive of all cash and cash equivalents, and net debt to adjusted EBITDA was approximately 1.6x. Please refer to Slide 6. As Chris mentioned, we are raising our full year 2026 guidance as follows. We estimate that net sales for the full year 2026 will be in the range of $4.5 billion to $4.6 billion, gross profit to be between $1.102 billion and $1.125 billion and adjusted EBITDA to be between $305 million and $315 million. Please note for the full year 2026, we expect the convertible notes maturing in 2028 to be dilutive, and therefore, we expect the fully diluted share count to be between approximately 46 million and 46.7 million shares. I will now turn it back over to Chris for an overview on our updated 5-year financial targets and to highlight certain of our initiatives supporting our growth expectations.

Thank you, Jim. Please refer to Slide 8 of the presentation. As we are halfway through the 5-year financial target ranges we set out in 2023 and are on track to meet or exceed those targets sooner than expected, we felt it appropriate to update our expectations to full year 2030. Our organic growth has exceeded the 4% to 7% target range established in 2023. with a focus on full year 2028. Much of this growth has been driven by the accelerated investment cycle in a number of our key areas, including our expansion and distribution capacity, sales teams and product specialists, investments in technology, consolidation of facilities and routes and key strategic acquisitions. Referring to the slide titled 2030 Financial Goals, our updated target ranges are as follows: an annual revenue growth rate of 7% to 10%, reaching full year 2030 revenue of $6 billion to $6.5 billion. We assume organic growth will be the primary driver, with the potential for moderate acquired growth of approximately 1% per annum. In certain years where more significant M&A would occur, we would expect total growth to exceed the estimated range. Adjusted EBITDA of $450 million to $520 million, adjusted EBITDA margin of 7.5% to 8%. Achieving these goals will not come from 1 or 2 areas of execution, but from many initiatives across our platform coming together over time to drive continued growth, market share gains and improved operational efficiencies. In summary, we will continue to grow our differentiated model in the food-away-from-home industry, focusing on the upscale casual to higher-end dining experience customer base, bringing together our unique supply chain and marketing model with deep product expertise and the ongoing training of a maturing sales force, increasingly positioning our people as trusted advisers to the best chefs, combined with the deployment of our ever-evolving technology and a flexible distribution platform. We expect to continue to deliver operating leverage going forward by driving volume through invested capacity, consolidating routes and distribution centers into efficient and state-of-the-art facilities and processing centers, both reduce cost per unit and drive top line growth via marketing opportunities with existing and potential customers. We will continue to invest in distribution capacity across our network to provide both growth and operational efficiencies going forward. Current plans include New England, Texas, Las Vegas, the Midwest and potential new markets as they develop. We have begun and expect to continue to deploy AI-based tech across our functions, including sales, pricing and procurement, operations, inventory management, logistics and customer experience. Building on the data and analytics platform we have rolled out across operating companies, these tools give our teams real-time information to serve customers better, upsell more effectively and manage inventory and costs more efficiently. CW teams across our regions and functions are committed to continual improvement and innovation in these areas and others all with a laser-like focus on maintaining and growing our unique culinary-focused culture that has been curated over 40 years. These areas represent the key components to the Chefs' Warehouse differentiation or moat within the industry. These competitive advantages, combined with the significant size of the underpenetrated market opportunity in virtually all our regions where we believe we remain in the early innings of penetration will allow us to continue to grow market share going forward. I will turn it over to Jim to review our thinking on capital allocation. Jim?

Thank you, Chris. Please refer to Slide 9 of the presentation. We expect our capital allocation model going forward to be consistent with the approach we have taken over the past few years as we have generated approximately $270 million of free cash flow since implementing the plan at the start of 2024. We expect total Capex to average approximately 1% of revenue going forward and capital deployment to be focused on the following areas: continued investment in growth via distribution center development and fleet expansion to accommodate capacity needs for markets as they mature. Investment in AI and other technology improvements focused on key areas: operations and inventory management, customer-facing digital enhancements, driving upsell opportunities, enhanced search and other value-add services, enhanced sales force training and data utilization to better understand our customer needs and behavior and dynamic pricing and sourcing initiatives. We're going to maintain a strong balance sheet and increase share repurchases. Target net debt to adjusted EBITDA leverage of 1.5 to 2.5, and we expect to allocate more dollars to share repurchases as leverage remains in the target range. We expect to retain dry powder to facilitate tuck-in M&A should accretive opportunities arise. And going forward, we expect free cash flow conversion to be in the range of 40% to 60% of adjusted EBITDA. Thank you. And at this point, we'll open it up to questions. Operator?

[Operator Instructions] Our first question comes from the line of Alex Slagle with Jefferies.

Really impressive growth. I just wanted to get your perspective on what's going on from a demand perspective. I mean, really strong demand in your U.S. business, and we can kind of see the broader demand in foodservice at the upper end. But where are you seeing the biggest acceleration? Or what surprised you the most, both placements and the new customer growth are really strong? Is it a business you're winning from other specialty players? Or is it more just broadening of new types of customers trying to expand the quality of what they put on the menu? And I guess just some more color on that would be great.

Yes. A really easy answer. You mentioned everything, Alex. It's -- there's no like one secret thing going on. It's kind of Goldilocks. It's the large investments we made into building a sales force, giving our team new buildings with capacity, ability to add categories, cross-selling, team building, specialists, maturing of a lot of new people that we've been hiring coming out of COVID. So it's just execution on all sorts of levels, and you see the outlook. we think we're just getting started really in building this thing for so long. It's a 40-year-old business that's maturing now as a public company, and we're just finally getting the scale that we could start to leverage what we thought would be a great business model at Chefs' Warehouse.

Got it. And you raised the longer-term outlook for the organic sales growth also. Is that additional market share gain baked in kind of going from 4% to 7% to 6% to 9% organic sales growth outlook?

Thanks, Alex. If you look at the algo that we put out in '23 to '28 was 4% to 7% -- we've been outperforming that by 200 or 300 basis points since then. So we just think it made sense to kind of raise that algo to 7% to 10%. It is risk-adjusted to what we're doing the last couple of quarters. We've been growing above 10%. So there is some conservatism in there on risk adjustment. But I think we feel good about it because it's still an industry-leading growth algo, both from top line and adjusted EBITDA growth cadence. So it's really just kind of aligning with what we've been doing and where we see all the things that Chris just mentioned, the capacity we put in, the capacity we're going to put in as we make -- continue to make a measured amount of investments across our network. So it really just kind of aligns with our plan.

Our next question comes from the line of Mark Carden with UBS.

You guys continue to generate pretty strong top line growth really across the business. So building on Alex's demand question a bit, did you see much fluctuation on a monthly basis? Do you think that you saw much of a benefit from unique events like the World Cup and the mix being NBA finals? Just any incremental color there and how it's been holding up quarter-to-date with some of the unique events like Cyclone and some of the wildfires?

It's been pretty consistent. I mean our growth -- our year-over-year growth in the second quarter was a little bit higher than the first quarter, but you have to remember, we had 2 major storms and the start of the war in the first quarter, and we talked about that having about 150 basis point impact on the year-over-year. So really kind of taking that out of the equation, our first half growth was pretty consistent across the board. I wouldn't say there was anything that really stood out other than the normal seasonality. The World Cup, we don't think had a major impact for us. We talked to a lot of our customers, and they did not see a huge uptick even in our major cities. We think that it was more sports bars and pubs that got the uptick from the World Cup for those 4 or 5 weeks. And then some regions that we don't really operate in like Kansas City, and obviously, we're not in Mexico or Canada -- we are in Canada, but we didn't see much of an uptick there. So I wouldn't say there was anything to call out. We've seen pretty consistent strength throughout the first part of the year.

That's great. And then it sounds like your Middle Eastern business is proving to be pretty resilient just given all the turmoil in the region. You mentioned that you're in the slow period there. How long does that last? And then outside of the conflict, how impactful have the Middle Eastern events just been on your product sourcing, thinking about blockades and whatnot?

So the last part of the question, we haven't seen an impact on our sourcing into North America. Obviously, our team over there has been dealing with some challenges around getting product in the Middle East, but they've done an amazing job of working with suppliers to reroute, go into different ports, go over the air, over the ground where we used to take it over the water. So obviously, there's some long leads and the prices of product have increased as a result of those logistics changes. But our team there is doing an incredible job of managing through that volatility. In terms of the first part of your question, we did build in some conservatism into the forward guidance because we are comping to a period this summer where there's not a lot of tourists in Dubai, and that's been the main difference between operating at 100% and we were operating at 75% in the beginning of the conflict. As we got into the summer, we were comping to a period where it's 120 degrees there and you don't really have a lot of tourism. So the hotels were not as full last year as they were this year. So we kind of moved up into that mid-90s range. But it's still uncertain whether the level of tourism that will come back in the fourth quarter. So we did build in some conservatism into our guidance as it relates to that.

Our next question comes from the line of Todd Brooks with Benchmark.

On another amazing quarter, guys. A couple of questions for you, if I can. One, kind of educated us over the years, Jim and Chris, that this is a hard business to inflect margin meaningfully in. It's more of a kind of a yearly grind, let's get our 20, 30 basis points out of EBITDA margin. The last couple of quarters, the EBITDA margin performance has been amazing. The new kind of forward 5-year plan is taking us into that upper 7s to 8% range, which is kind of a new frontier for profitability in the business. How should we think about the ratability of the improvement between this year where we may end up in the high 6s and getting into that high 7s? Is this just a step-up year for some reason or you reset to that 20, 25 basis points a year in the guidance framework? Or how should we think about that?

Yes. I'll let Chris comment as well. But Todd, I think if you know us, we tend to be a little conservative in our forward guidance. And we've risk-adjusted the 5-year algo as well. So I think there's definitely potential for upside to that, but we want to build in potential things to happen that we don't control. So I think it implies really industry-leading top line growth, industry-leading adjusted EBITDA margin improvement over the time frame and continued operating leverage. So you never know what the cadence is going to be exactly. But I think we're not saying that we can't repeat what we've been doing recently. We're just -- this is a 5-year look. And obviously, we're going to build in some risk adjustment.

Yes. And it's a great question, Todd. If you go back to our history, again, we're celebrating our 41st going into our 41st year since we started the business as mainly a specialty business. And before we went public, and started adding a lot of costs to build the model, it was a very -- it was a much higher EBITDA business. It was 10% plus. And adding all the infrastructure to build Chero house and adding new divisions, you've heard me say for years, listen, this is a big drag. Once we get scale, the EBITDA margins will go up, and I'm not going to cap it. So we just updated our model until 2030, which is pretty much based just continuing as a specialty broadliner. And as we fill up -- we're giving ourselves room, we're building new facilities every year. And when you add space, usually, you're adding more space than you need, so you're carrying more overhead. So that's a little drag on EBITDA. And as we fill them up, as we're starting to do right now, you start to see the real EBITDA of the company starting to show itself, right? So I think I've said many, many times, we have a lot of our core business, way over 10% EBITDA businesses. But this is a model that purposely, we built the moat around. So it's very hard to copy because there's such a long tail to what we do. We always say we do the hard stuff. So we have to have -- we have 170 different olive oils, right? You have a very long tail, you're carrying extra inventory, your overhead is higher than a typical broad liner. But the flip side, once you execute and you start to get scale, it's very hard to replicate, right? This is a 40-year-old business. and you can get leverage on it, which you're starting to see. So tomorrow, there'll be great opportunity. You see our model takes us over $6 billion. We could be $10 billion, but we've added more businesses that we thought there was opportunity that were lower margin to turn into Chefs' Warehouse types of business that we've been doing over the past 10 years. So our forecast, again, is based on continuing to do what we're doing, moving into new buildings, expanding into new territories and continuing to execute with our team sale, our cross-sell and continuing to add new customers and sell our customers more products, which we think we can execute into our 2030 plan. Add that with a bunch of tuck-in small specialty businesses, you can easily be $8 billion, $9 billion and a very high-margin business. Add some more businesses that are great businesses, but they'll need 4 or 5 years like other businesses that we bought. So maybe that prevents us to going to a 9%, 10% EBITDA. But at this point, I'm so proud of the team and the execution of all teams that I'm not capping where the EBITDA can go percentage-wise.

Okay. That's great. Just a quick follow-up. If you're talking more overtly about your moat and kind of laying out the case for how you've built it through investment over the past 5 years here. What's your competitive environment like in specialty? And how are you winning market share? Because you're obviously aggressively taking it. Is it these capabilities and the moat and customers recognizing that? Or is your competition not performing as well and opening potential businesses eyes to the possibility of making us switch to the Chefs' Warehouse?

Yes. There's plenty of competition. I mean we fight every day. But I think with the technology that we're just getting better and better at implementing better and better technology, making it easier for customers to do business with us and order more items. So I think we believe that was what's going to happen, and it's happening. So it's good to be right once in a while. And it takes 5 to 10 years to develop people. So as much as everything is going online, and it's a great tool, -- we are in a relationship business. We sell the best chefs in the world, and they need information and they constantly need new product. And it's a stressful environment. You have to execute. When you're at the top, they're expecting a lot. And the supply channels are always challenged for some reason. And so the logistics team, we rely on them really, we cannot leave our customers without product, right? It's not like you're going to -- you're at a $20 average check average and you could substitute and no one's really going to complain. Our customers are very demanding. -- and we have to execute at a very high level. And to do that takes a lot of expertise. You can't just rely on computers. And it takes a lifetime to develop that type of team. And I think that the results you're seeing is because of that lifetime investment in people. So we're very proud of them, and we know how hard it is to duplicate this.

Our next question comes from the line of Brian Harbour with Morgan Stanley.

You've talked in the past about some of the younger markets could be 3x, maybe 4x the size they are today. I guess as you think about adding a couple of billion of revenue over the next 5 years, I mean, where are we in some of those? Or what are you -- what opportunity are you assuming in some of those big relatively underpenetrated markets?

Yes. Well, I mean, we have the microscope to look at what we've done in other businesses in other cities as they've grown, right? So the West Coast, East Coast, obviously, is most populated. And we look at how we've grown our more mature markets over the last 40 years. So as our new markets are developing, they're developing kind of very similar to how we developed our more mature markets like New York and San Francisco. So when we look at Texas and Florida as big markets, and then we have our smaller markets, Nashville, Detroit and as we push into the Carolinas and Colorado, we see lots of similarity. So it gives us the ability to pretty much forecast. So places like Texas and Florida, we see customer growth. We see maturity of sales staff. We see logistical efficiencies starting to form. It's almost like a repeat of a playbook as salespeople mature, as everybody gets better, as logistics get better, we start to sell more products, our margins improve, and we continue to add people. And that's why we see the 3, 4, 5x in those markets because we're really small with lots of opportunity. We go to a market where not a lot of people, not a lot of customers, I think there's a ceiling. Even if you get all your categories humming, the business is only going to grow so x. So that's why we see our bigger markets really adding a big amount of that growth we're talking about.

Okay. Sounds good. Is there any of the like tech investments you made or maybe like uses of AI that you point to is actually kind of driving margins today? Like I think certainly, some of this is from just efficiency and like sales force efficiency and warehouse efficiency, you talked about that. But how would you sort of point to some concrete examples of like technology investments helping as well?

Yes. I like to use the metaphor of -- you have a really smart student -- she is doing great. And -- but they've always had a lack of great eyesight, right? You put great glasses on them. And now they could do even better, right? They can digest the information quicker, make better decisions and go faster. You give the same pair of great glasses to an average student. I mean, they'll still do better. But I look at Chefs' Warehouse as we had a great student, and we gave them really powerful lenses and they could do -- they are doing an even better job, right? So the tools are just assisting them to be a lot more efficient. and do what they need to do at -- execute at a higher level. So it's definitely making a difference, and we think it's going to continue to enhance our model and the ability to sustain our growth rate.

Our next question comes from the line of Kelly Bania with BMO Capital Markets.

On just really strong execution here. I had just maybe a near-term question and then some longer term given the new targets. I guess, first, as we look at the second half guidance for '26, it sounds like top line continuing at this low double-digit rate. So I guess my question is just if the top line continues at this pace, is there any reason why the margins wouldn't be as strong as they were in the first half? Obviously, the OpEx leverage was very, very strong this quarter. But just curious if there's any reinvestment or other factors or maybe why the margin wouldn't be quite as strong.

Kelly, are you referring to gross profit margin or EBITDA margin?