Business Overview
Company Overview
Performance Food Group markets and distributes food and food-related goods through 3 key reportable segments namely: Foodservice , Vistar and Convenience. Additional elements that are considered minor and account for less than 0.5% of the group's revenue are intersegment eliminations and corporate & others. It is currently the 3rd largest player in the food-service distribution industry with 9% market share , behind Sysco and US Foods Corp.
Foodservice
Foodservice offers a broad line of products that includes perisables, frozen, dried , kitchen supplies and value adding consulting services in food operations customisable to suit each client menu's requirements. Foodservice mainly focuses on restaurant customers such as independent & chain restaurants and institutional clients like hotels, healthcare facilities etc. Foodservice currently consists of 78 distribution centres and serves over 175000 customer locations.
Vistar
Vistar is a leading national distributor of brands of confectionary items & beverages for vending, offices, hospitality and entertainment businesses. Vistar has 25 distribution centres and serves over 75000 customer locations.
Convenience
One of the largest foodservice and wholesaler consumer products distributors in the convenience retail industry. It offers an assortment of products (Eg: tobacco, perishables and beauty products) , technology solutions and marketing programs to over 50000 customer locations. Its customers include convenience stores, petrol kiosks , grocery stores etc. Convenience has 39 distribution centres with 35 in the US and 4 in Canada.
Diversified Revenue breakdown & geographical segments
As seen from above , PFGC revenues are largely driven by Performance Food service segments with 50% and contributing to 65% of EBITA margins and 42% of revenue under Convenience segments and small but fast growing segment of Vistar contributing 8% of revenue with ~20% EBITA margins.
In terms of geographical breakdown , PFGC operations are highly concentrated in the US with some exposure to Canada largely under the Convenience segment. No single customer constitutes more then 10% of PFGC's revenue.
Growing Sales whilst improving operational efficency
PFGC has seen growing sales revenue YoY with a CAGR of 7% from 2019 to 2023, and seen reducing SG&A (as % of sales revenue), which signified improvement in operational efficiency largely due to the economies of scale of PFGC as it scales it business through organic growth or M&A.
Diversified business model PFGC has a unique business model that creates significant touch points for its customers as seen from above . This significantly improves opportunities to hit Amercian consumers through its operator customers. With many touchpoints and cross selling opportunities with various partner brands eg: GoPuff through its various collaborations, it helps further strengthen its brand image amongst its competitors.
Industry Overview
Eyes on the prize: Huge opportunity for market share gains for PFGC
1) Untapped huge addressable market potential
As seen from the market sizing chart above, we can see that PFGC only has a very small portion in the realms of food service, and given its small market size , there is a significant portion of the market that PFGC can still capitalise on with its focus on M&A , white space expansions & supply chain expansions.
2) Growing Appetite for Food Services
Future projections for the US food service industry include a compound annual growth rate (CAGR) of around 10% through 2030 at US$1.7T, as reported by Fortune business insights. Due to the increased need for distribution to both independent and chain restaurants as well as diverse institutions, this would indicate robust growth for the PFGC.
3) Shift in consumer preferences towards healthier snacks
As seen from the market size growth of healthy snacks, it would reflect the stronger demand for it, especially given the increasing return to office policies, which would lead to stronger demand for snacking on healthier options. This brings significant growth opportunities post covid for C-stores (Convienence Stores) and Vistar to leverage on its brand positioning and healthier snacking options like sandwiches, salads etc to capture the growing appetite for healthier snacks be it in malls or office areas.
4) Higher then anticipated deflation of food prices (Short term Headwinds)
As seen from the graph, we see a significant decline in wholesale food prices, especially in Aug & Sept 2023 and this could be a cause of concern as lower wholesale prices would negatively impact PFGC and its industry peers topline sales growth. In periods of deflation, it could negatively impact as PFGC generates a significant portion of sales at prices based on the cost of products plus a percentage margin, mark-up or fee per case. However, as seen in Nov 2023, prices have started rebounding and according to analysts and PFGC estimates, they believe that moving into 2024, we can expect to see moderate inflation growth, which is ideal for PFGC.
Porter 5 Forces
Investment Theses
Investment Thesis 1: Strategic M&A activities driving business growth & synergies
Hunger for Strategic M&A acquistions
PFGC has made significant strides to acquire new companies to drive business synergies and growth amidst a tough crowd.
Methodical approach to ensuring success in M&A deals
Tri-Prong framework in PFGC M&A
PFGC focuses on its growth story with strategic M&A to expand its geographical reach or wielding cost synergies benefits. This is combined with aligned market dynamics; surveying and adapting to key market trends and sourcing for opportunistic acquisition in driving topline. Lastly, in terms of strategic fit, it is considering whether the acquisitions meet PFGC key financial and cultural goals and thus far the acquisition, especially Core-Mark, has been successful in delivering top line revenue generation in a highly fragmented market.
Investment Thesis 2: Winning with organic growth to drive topline margins
Foodservice - Winning with Food
Spearheading margins expansions with independent sales growth
PFGC has slowly shifted its focus to independent sales growth from ~34% in 2017 to 39% in 2023 of % total food service and seen a 7.3% YoY case growth for independents. This is extremely key as these independent businesses offer higher margins and act as a hedge against loss of restaurant traffic.
Independent brands drive private label expansions
Private labels grew from 39% in 2014 up to 50% of independent cases. For independent cases, some OPCOs can generate up to 60% private label mix.
This reflects the potential to push its house Performance Brands to independents , which offer higher gross margins and pushing PFGC topline food service growth. In the near term , its value driven approach would help drive growth in a more challenging economic backdrop. Beyond food products, these independents also seek for more value adding services like procurement & menu design driving its overall margins.
Convenience - Underappreciated Differentiator
Underappreciated strong growth synergies in Convenience
In terms of convenience segment , with the acquisition of Core Mark and Eby Brown made PFGC the largest convenience distributor in North America. The market was concerned about the management focus on a lower margin segment in Convenience rather than the food service channel. However, they overlooked the strong synergetic effect within food service and targeting growth through new customers' acquisitions and SSS growth.This would help spur growth within Convenience.
With the integration of these new acquisitions, it helps drive cost savings of $15M within Convinence and also allows for cross-selling opportunities within Foodservice and Vistar.
Differentiated and Best in Class in Convenience
Convenience reflects strong growth potential for PFGC to capture. Currently PFGC is looking to grow its product mix in convenience, especially in terms of private labels , curated brands (exclusivity with emerging brands. In terms of fresh food , PFGC is the only company that is capable of shipping its fresh products few times a week , to every OPCO. This allows them to be more competitive in the convenience segment against more traditional broadliners in pricing and product mix.
Beyond fresh foods, PFGC has a special curated restaurant quality supply of products , which is unattainable by broadline distributors in the near term . This allows them to focus on customer experiences rather than food side of things. The unique combination of convenience, specialty products and robust sale and marketing strategies make PFGC more sticky to consumers , allowing them to differentiate themselves from its peers.
With a sizeable serviceable addressable market of $127B combined with strong tailwinds , the segment is posied to drive significant future topline sale growth through leveraging on its market positioning and brand differentiation.
Vistar - Sweet but packs a punch
Vistar is a differentiated channel for PFGC, and unlike PFGC’s foodservice segment , the Vistar business has a dominant market share as a national distributor of candy , snacks and beverages across a diversified customer base.
Expansion of unattended retail space
In terms of unattended retail space (self-checkout kiosks) have seen significant growth from 500 locations to over 63000 in 2022 with double digit growth even during the pandemic.This is in line with estimated industry growth of 15% CAGR as retailers push for self checkouts to improve efficiency and customer experience.
These retail spaces added new ways to get convenient bites and drinks with a wide array of assorted products.These allow for the ease of bundling items together to make a meal or quick snack. This would encourage larger basket sizes for operators and allow for them to be nimble to adapting to food replenishment and consumers changing taste and preference of its products, driving potential higher sales for them.
Tech enabled fulfilment centres with last mile delivery
Vistar has automated significantly its 3 retail centres (small parcel shipments) . With leverage on technological capabilities with automation in picking and packing parcels, Vistar allows products to be able to deliver to 96% of the population in 1-2 days.
With the tech-enabled fulfilment facilities , this helps boost PFGC E-commerce & Q-Commerce segment.Given PFGC scale and supply chain, they could act as fulfilment service centres for manufacturers and customers alike. Even if its clients utilises a third party website , PFGC would still be able to capitalise on fulfilment opportunities for them.
For Q-commerce, it capitalises on customer inclination towards fast delivery for smaller sized orders. The quick commerce segment is expected to grow at 10% reaching a market volume of US$77Bn in 2028. In order to fulfil the order PFGC has strong relationships with DoorDash and especially GoPuff to supply them with food solutions, and Go-puff helps achieve the last mile delivery for PFGC in a direct sale to end customers.
The strong synergies between each of the three segments , combined with strong industry tailwinds, make PFGC poised to continue to achieving strong topline growth.
Investment Thesis 3: Strong levers to manage inflationary pressures & strategic initiatives to supercharge PFGC growth
Expenses Management
Cost Management
While on whole, strong deflationary pressure on food prices is undesirable for PFGC , neither is spiking inflation. However, in terms of operating expenses , PFGC has many levers to manage inflation in terms of food, fuel and labour. Food is mainly managed through pricing analytics and forward buying. Labour, it is mainly through cost to serve analytics and inflation indexation clauses. Fuel, PFGC has adopted costless collars (allows PFGC to pass on fuel surcharges) and route efficiency software to determine optimal fuel efficiency usage.
Strategic Expenditures supercharging PFGC growth
Diversification with strategic investments to drive sustained business growth
Unlike its larger peers, such as SYY or US Foods, PFGC has the largest diversification across customer segments and product mix, better insulating itself to macro trends and shifting customer preferences. As seen from the chart below, although SYY has the most subsegments, the items mix generally are segregated by customer locations and business operations of similar products offering limited category mixed as opposed to PFGC, which offers a much more diversified mix across the 3 subsegments serving very different product lines with exclusive collaborations that offer significant cross-selling opportunities to clients on a single platform.
Customer centric focus to drive topline growth
PFGC has focused on growing its salesforce with technologies and focusing on customer pain points even during the Covid pandemic resulting in gaining market share, despite a challenging environment for its restaurant clients. PFGC has grown its salesforce by nearly 50% from 2020 to currently 35000 associates as of FY24 Q1.
Such a platform allows customers to order their products with ease. Unlike previously, there were multiple applications in place for each business segment . It has now been streamlined into a single platform to improve customer experience and has an "endless aisle" feature, which leverages PFGC cross selling capabilities, where a customer from food service can tap on products from Convenience or Vistar as complementary products for their business needs. This would help reduce churn rate of its customers and drive higher basket sizes as well , aiding it topline margins. The success can be seen via a report by wReport , which shows PFGC ranking first ahead of its peers on mutiple key customer engagement metrics. This reflects its strong brand value for customers and allows PFGC to capture greater market share.
Strategic expenditures supported by prudent debt management
In terms of debt management, PFGC has been consistently managing its debt well, with a debt to EBITDA of 3.2x lower than that of its two closest peers at 3.9x and similarly for debt to equity ratio PFGC is less levered then its two key peers.This reflects PFGC prudent debt management , despite its thirst for M&A and facilities expansions to drive EBITDA growth, giving it the flexibility to expand its operations and buyback of shares to raise shareholder value.
Valuation
Relative Valuation
Using relative valuation, we can see the range of implied stock prices ranging from $44 to $107 representing range of downside of 45% to upside of 68%.
Discounted Cashflow Model (3 & 5 Year Price Target)
For the model, using the CAPM method , with a COE of 10.19% & an after tax COD of 3.43%, I derived a WACC of 8.33% as the discount rate. Next, using the Gordan Growth Terminal growth method of 2.3% , I derived a stock price of $98.41 (5 Year PT) representing an upside of 51%.
Key Risks and Mitigations
Conclusion
In conclusion, I would reiterate a buy call of target price $98.41, representing an upside of 51% on PFGC based on its strong industrial tailwinds combined with management's focus on EBITDA expansions across all three segments supported by the three theses. I certainly believe that PFGC will continue to expand and command more market share in a highly fragmented industry with tight margins.
Share Price Comparison between the 3 largest players
Updates to PFGC (Key Notes) - Q2 FY24 Earnings
Basing off the recent earnings transcript on 7 Feb 24 , for Q2 Earnings : Overview Organic case volume grew 2.1% for Q2 2024 --> driven by organic independent growth , performance food brands and growth in the Foodservice + Vistar segments. Net sales rose by 2.2% to $29.2B due to increased cases , offset by decreased selling prices/cases due to deflation of 1.4% Operating Expenses rose 4.8% YoY on the back of accelerated depreciation of acquisitions , repairs & maintenance and salaries Adjusted EBITDA rose by 9.9% , with Net Income rising by ~20% Yoy By segment Foodservice YoY sales increased by 2.4% , driven by independent and chain businesses , although hurt by declined case prices.However securing new independent customers resulted in 8.7% increase in independent case growth. Q2 2024 independent sales % of total sales is 39.1%. EBITDA YoY growth 4.6% supported by favourable shift of more Performance brands to independents. Convenience Yoy sales increased by 1.3% , due to increased selling price of cigarettes and inflation of food and food service related products. EBITDA YoY growth of 20.5% supported by pricing improvement from procurement efficiencies and opex reductions due to lower overtime and personnel expenses. Vistar YoY sales increased by 7.4% , due to higher selling prices due to inflation and case volume growth. EBITDA YoY growth 1.5% supported by 9% growth in GP , offsetted by 14.7% increase in OPEX. This is largely due to better procurement efficiencies and case growth , although offset by higher rental expenses and expected reduction in inventory holding gains.
Adjustment to Model Inputs (Unchanged) Given management kept its forward guidance unchanged, at the moment given its YoY growth momentum across all 3 segments coupled with deflationary pressure still lurking and affects its topline growth drivers partially, my stance remains unchanged, at least in the near term.
Earnings Growth
Latest Updates
Dual Prong Approach in reaching new customers Driving brand image under its convenience segments Partnership with GPM subsidiary of ARKO - one of the largest convenience store operators in the US --> offering premium pizza at an affordable price , benefiting PFGC in terms of this partnership to be able to deliver to over 1000 GPM stores , strengthen their relationship of more than a decade.
Premiumization of its product lines
Performance food group is pleased to announce it is the first food distribution company to enter a partnership with The Hershey Company to incorporate a variety of well-known Hershey products into its desserts.PFG’s premium line of dessert offerings, Sweet Encore, will now feature Hershey ingredients including chocolate, caramel, Reese’s Peanut Butter Cups, Reese’s Pieces and Heath Bar bits. Conclusion This could potentially represent PFGC consideration towards premiumisation of its product, elevating its products for its customers on top of its own performance brand products, which could open the floor for stronger partnership with both independent and chain restaurants and institutions to supply Hershey-linked dessert products to its end customers. Overall this measures
Partnership with Hyzon (Four Fuel Cell Electric Vehicles ) ~ ESG foucused + Potential for cost and delivery efficencies.
Hyzon’s hydrogen FCEVs have an expected travel range of up to 350 miles today and an expected refueling time of fifteen minutes with fast fill dispensing. PFG plans to insert the vehicles into its fleet and put them in service to deliver snacks, candy, and beverages to its customers. The vehicles will be fueled with hydrogen delivered by Pilot Travel Centers LLC, a leading fuel and energy provider with the largest network of travel centers in North America. Hydrogen vs BEVs (Battery EVs) FCEVs have numerous advantages over battery electric vehicles (BEVs) in terms of payload, range, and refueling time. FCEVs are expected to be around 6,000-8,000 pounds lighter than BEVs, have a longer range, and can be refueled in as little as 15-20 minutes compared to up to three hours for BEV. These factors make FCEVs a natural choice for distribution and heavy-duty freight companies.
References
网页链接 (US FoodService Industry)
网页链接 (2023 Annual Report)
网页链接 (Investors Relations Presentations)
网页链接 (Sale of Orion Food Systems)
网页链接 ( PFGC Annual reports, events)
网页链接 (Growth of Quick Service industry)
网页链接(US Food Corp Annual Report)
网页链接 (Sysco Annual Report)
Appendix
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.
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