Evie Liu

While inflation has weighed on restaurant spending for many people, wealthy households are still splurging on Wagyu beef, stone crab, and other upscale menu items. Barron's wrote in February that Chefs' Warehouse, a premium food ingredient distributor, could benefit from the resilient demand as it's scaled up significantly since the Covid-19 pandemic.

Chefs' Warehouse distributes a range of specialty food items to more than 44,000 high-end restaurants, luxury hotels, and country clubs across the nation. Shares traded at $33 when we picked the stock. They have since gained 47% to $48.7 as of Dec. 27, soundly beating the S&P 500's 20% rise.

The company has been grabbing market share as it bought up smaller rivals that struggled with challenging sales and high interest rates. In 2022 and 2023, Chefs' Warehouse made a dozen acquisitions, growing its quarterly sales by 58%. It's also built more distribution centers, with plans to expand distribution capacity by 60% from 2022 to 2026.

Despite the aggressive growth, the stock stayed flat as investors worried about softer consumer spending on dining out due to more expensive menus. But Wall Street analysts believe that high-end restaurants could pass those costs onto their customers since wealthy diners have remained financially healthy and are willing to pay more for high-quality food.

The fast expansion also squeezed Chefs' Warehouse's profit margin as the newly acquired entities needed time to adjust and integrate. But management has dialed back from acquisitions and is focused on improving profitability this year. In the September quarter, sales was 5.6% up from a year ago, while earnings rose 9%, indicating better margins.

Chefs' Warehouse has raised its outlook for fiscal 2024 throughout the year. Management now expects net sales in the range of $3.71 billion to $3.775 billion and adjusted Ebitda to range from $210 million to $219 million -- all have improved from its estimates at the beginning of the year.

Barron's argued in February that there was a disconnect between the company's strong fundamentals and undervalued stock. Shares were trading at just 10 times enterprise value to estimated next-12-month Ebitda, much cheaper than the average level over the past five years. The gap has since been filled, with valuation reaching nearly 12 times now.

There should be room for further growth. According to FactSet, the eight analysts that cover the stock each have a Buy rating, with price targets ranging from $50 to $60. At the midpoint of $55, the stock could gain another 13% from here.

Write to Evie Liu at evie.liu@barrons.com

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December 30, 2024 07:39 ET (12:39 GMT)

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