Food Distributor Valuations – December 2022

Other than 2020, the valuations of publicly-traded food distributors increased over the last five fiscal years and through the end of 2022. The industry was adversely impacted in 2020 by reduced consumer demand in the food service, hospitality, and travel sectors. Much of the growth in 2021 and 2022 coincided with lighter pandemic-related restrictions and strong consumer spending. This article will examine some of the factors that appeared to have impacted the valuations of publicly-traded food distributors.

Important notes: This article examines potential driving factors for publicly-traded food distributor valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are only sometimes evident from the data on financial statements. Also, this article will focus on what is typically perceived as primary value drivers to keep the length manageable. It will only touch on some observations in the data. Check out What is Value? and Risk and Return in the Market Approach for a quick read on the basics of risk and return and how they apply to this article.

The industry constituents for this analysis are listed below. HF Foods Group Inc. was removed from the food distributor group for this analysis as it was delinquent in its filings with the Securities and Exchange Committee (SEC) for its fiscal 2021 and 2022 quarterly reporting periods. The effective date of this analysis is December 29, 2022.

Figure 1 summarizes three items for the food distributors:

• Market value of invested capital (“MVIC”) calculated as the sum of market capitalization and interest-bearing debt;
• Median revenues; and
• Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

The latest fiscal year is notated “LFY” (2021), while the latest 12 months is labeled “LTM” (latest available information as of December 29, 2022).

Valuations generally increased over the last five fiscal years, outpacing improvements in financial performance overall. Valuations continued to grow in the LTM period, despite a broad deterioration in economic outlook and market conditions.

As was noted in our prior analysis of this industry, much of the improvement in 2021 occurred as COVID restrictions lifted and consumer spending continued to rise. However, as 2022 progressed, supply chain disruptions, inflation, food shortages, and high demand created difficulties for companies in the broad food and food service industries. These disruptions caused operators along the supply chain to overcompensate with inventory purchases in 2022.  As demand cooled and transportation challenges resolved toward the year’s end, companies were left with excess inventory. These dynamics have drawn into question the adequacy of the just-in-time inventory management model that has largely dominated the food industry.

With the recent disruptions in the industry, food distributors may look to evolve through technology. Some of these developments may include investments in supply chain and order management systems to improve efficiency and transparency, warehouse management and automation solutions, and improvements in data analytics and the use of artificial intelligence to anticipate potential disruptions in the supply chain and changing demand.

Valuation Multiples

Figures 2 and 3 provide a view of the historical trend in valuation multiples (revenue and EBITDA).