Sector financial performance:

This company, a distributor of food to food service industry including independent restaurants, chain restaurants, healthcare and educational facilities, or/and hospitality, has been grouped into food service distributor - broadline sector.

This is a sector with intensive competition and highly market concentration that enables companies to take advantage of economy of scales and supply chain efficiency.

It seems the demand from food service in US market has been strong and growing in the past four years as indicated by our data of case volumes (increased at annual average rate 3%) but there is a signal indicating that the growth may be slowing down since 2018. It seems the increase has been driven mainly by the recent recovery of independent local restaurants sector and its increased merger& acquisition activities. Data indicate that demand from chain restaurants presented downward trend in 2015-2017 and played less important roles in generating profits for companies since they provide usually smaller gross margins compared with serving for local independent restaurants.

Benefiting from strong demand from food services and improved gross margins, companies have experienced increase in their profits while the volatile supply price of food, which are not easy to be passed on to customers.

A typical gross margin for companies in this sector is around 19% with around 15% SG&A spending as percentage of sales. Some relatively smaller distributor has much lower gross margin ( around 13%) with less spending on SG&A as percentage of sales of 12%. It seems economy sales and the relative efficient matter in companies’ margins. Therefore, their operating margins usually vary from 1.5% (smaller company) to 4%.

According our analysis, there is a large span between companies’ enterprise price/adjusted EBI from 27with interest/EBITDA ratio of 15%. 

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Company performance:

It seems the demand, from US food service industry, for most of categories of food has increased in the past several years as indicated in company’s case volume data. Price of food distributed by this company seems to be picking up in the past two years. Growth in sales from its international market seems to have been driven by increasing price but not volume.  

For first three months of fiscal 2019 compared with 2018 (ended 20180929)

Organic sales (excluding impacts of acquisition) to food service in the US market (account for 67% of total sales of this company) increased about 4.2% attributable to increase in sales volume of 3.9%. Organic sales to food service in the international market (account for 20%) increased about 1.6% in the same period, attributable to increase in pricing.

For fiscal 2018 compared with 2017 (ended 20180630)

Organic sales (excluding impacts of acquisition) to food service in the US market (account for 67% of total sales of this company) increased about 4.6% attributable to increase in sales volume of 2% and increase of 2.9% in pricing. Organic sales to food service in the international market (account for 20%) increased about 3% in the same period, attributable to increase in pricing.

Organic sales (excluding impacts of acquisition and extra week) to food service in the US market (account for 67% of total sales of this company) was flat in fiscal 2017 compared with 2016, attributable to decrease in meat and sea food offset by increase in sales volume of other goods (1%). Organic sales to food service in the international market (account for 20%) decreased about 3% in the same period, attributable to decrease in sales volume of sea food.

Organic sales (excluding impacts of acquisition) to food service in the US market (account for 75% of total sales of this company) increased about 2.4% in fiscal 2016 compared with 2015, attributable to increase in sales volume of 3.1% offset by decrease in pricing. Organic sales to food service in the international market (account for 10%) increased about 2.3% in the same period, attributable to increase in sales volume of some meat and seafood.

Organic sales to food service (including US and international market) increased about 2.8% in fiscal 2015 compared with 2014, attributable to increase in sales volume.

This company’ gross margins as percentage of sales got improved from 17.6% of 2014 to about 19% of 2018. However, as its increasing spending on SG&A as percentage of sales in the past three years its operating margin went up only by 50 basis points to about 4% during this period of time.

Stock price

This stock currently has an enterprise price/EBI ratio of 28, which we think, is relatively fairly valued compared with its peers.