• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Chicken gains on the week as the usual suspects reverse their direction and decline week-over-week.

This past week was a week of deflation for commodities.  Events in Japan, and the ongoing concerns regarding the implications of the tragedies,  have put pressure on commodity prices across the board.  Cheese, corn, coffee, and wheat, are all up between 40% and 90% year-over-year but declined sharply in the last week.  This will offer some encouragement for restaurant operators and shareholders that commodity inflation may be moderating.  Chicken (broilers and wings) gained on the week but year-over-year inflation is not a concern for the protein. 

Cheese prices declined 10% week-over-week.  As the chart below shows, cheese prices remain elevated and restaurant companies with exposure to cheese.  Below, I provide some commentary on cheese from both management teams provided during their most recent respective earnings calls:

 DPZ: 

"Yeah, so the forward curve and kind of looking at about three different sources right now have cheese actually easing a little bit through the rest of the year. We're at almost $2 right now. And so, our expectation is that we're going to see a little bit of easing, to give you on cheese. We've talked about this in the past, we've got a contract in place that basically reduces the volatility on cheese moves by about a third. So about two thirds of increases or decreases in cheese are passed through to our system.

I think the kind of consensus forecast out there right now for cheese are in the $1.70 to $1.75 range. And – you know so what you're looking at is kind of a $0.25 to $0.30 move and I think we've said in the past a $0.40 move in cheese is equal to a point at the store level P&L."


PZZA:

We expect the favorable impact of early year sales results to substantially mitigate the unfavorable impact of currently projected commodity cost increases, most notably cheese, throughout the remainder of the year.

 

DPZ is 95% franchised and, as such, management claims a degree of insulation from commodity costs.  Of course, to the extent that price needs to be taken and royalties slow, the company is not immune from inflation.  The downward move of cheese over the past week will raise hopes that a price increase can be avoided. 

Looking at the chart below, the trend in cheese prices seems to be levelling out.  Nevertheless, even if cheese prices were to trend horizontally throughout the rest of the year, at it’s most benign, cheese price inflation would be 13%. 

WEEKLY COMMODITY MONITOR - cheese 316

Corn’s decline over the week was largely focused on corn importers in Japan delaying purchases in the wake of the disastrous events unfolding there.  Corn is a key input for the livestock and poultry businesses and, at +73%, remains a headwind on a year-over-year basis but has declined abruptly on the news from Japan.

WEEKLY COMMODITY MONITOR - corn 316

Chicken wing prices definitely deserve a callout this week.  While the gain in prices was muted, at +0.5%, it is possible that this signifies the end of a longer downward trend in chicken wing prices as concepts like DPZ shift to chicken and increase demand for the commodity.

WEEKLY COMMODITY MONITOR - chicken wing 316

WEEKLY COMMODITY MONITOR - commodities 315

Howard Penney

Managing Director