Chefs’ Warehouse (CHEF -9.29%) stock fell early Thursday, with shares declining 10% by 11 a.m. ET, compared to a 0.8% increase in the S&P 500. That slump wasn’t enough to change the positive wider return picture, though, as Chefs’ Warehouse is in slightly positive territory for the year compared to a 17% drop in the wider market.
Thursday’s decline was sparked by news that the company is taking on a new round of debt.
Chefs’ Warehouse announced late Wednesday that it is seeking $250 million of new loans. The debt will be in the form of convertible notes, meaning its owners will have the option of exchanging them for the company’s stock. Management says it plans to use the debt partly to pay off older loans, which have a 2024 due date. The new round of notes will be due in 2028.
This move might add some pressure on the stock over the short term as some debt is converted into shares, thus adding to the supply of the stock. Earnings will see some pressure from interest expenses, too, which last quarter increased to $11 million from $4 million a year ago. Those factors help explain why the stock fell in response to the news.
Chefs’ Warehouse still has a solid outlook despite slowing consumer spending due to inflation. Management raised its growth outlook in late October after sales jumped 37%.
The stock’s long-term returns will ultimately depend on continued strong growth like that, and on the company’s ability to maintain a higher gross profit margin as it raises prices.
To date, its restaurant clients have been willing to pay higher prices for its premium and specialty food products. Maintaining that positive trend would mean the company can still grow per-share earnings even after issuing more stock.