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Chefs’ Warehouse (CHEF -0.87%) investors lost ground to a declining market this week. Shares were down 12% through Thursday trading compared to a 2.7% slump in the wider market, according to data provided by S&P Global Market Intelligence. That drop put the stock at a 2% increase so far for the year, while the S&P 500 is down 17% in 2022.
The dip came as investors learned that Chefs’ Warehouse is taking on new debt.
Chefs’ Warehouse announced on Wednesday that it is seeking up to $250 million in new loans in the form of controvertible notes. Additional debt brings increased interest expenses, which are pressuring the specialty food provider’s earnings right now.
The convertible nature of the debt also threatens to weigh directly on Chefs’ Warehouse stock over the short term because it will likely add to the company’s outstanding share count.
The debt is not a sign of major financial challenges in the business. In fact, Chefs’ Warehouse recently raised its fiscal-year outlook. The company remains busy on the acquisition track, too, having recently purchased a speciality food distributor with a focus in the Middle East. The new loans will help the company continue its growth investments and will allow it to pay off previous loans that were set to come due in 2024.
Investors will want to continue watching key growth metrics like sales, which have been strong in recent quarters thanks to solid demand at restaurants and other dining establishments. Chefs’ Warehouse could see weaker results here if economic growth rates slow further.
Keep an eye on profitability, too, for signs of reduced pricing power. To date, this hasn’t been an issue, as gross profit margin expanded in the most recent quarter.
More success on this score will help the stock continue to beat the market, even if per-share earnings are pressured a bit more by debt in 2023.
Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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