The year-over-year column of our commodity monitor remains green for all items with the exception of chicken (broilers and wings).
Earnings over the past few days, and investors’ reaction to those earnings, have anchored heavily on the commodity outlook of the respective companies. For the most part, the outlook is bearish which explains much of the negative price action in MCD and CAKE last week. How commodity costs will be absorbed and/or passed on to the consumer is a key question at present. BWLD is in the extraordinary position, for a restaurant company today, of having commodity favorability of the order of 36% year-over-year for the just-reported first quarter. One thing that stands out, below, is that grains continue their march higher. This is likely to support protein prices over the longer term but, as is evident below, chicken, beef, and pork prices all declined week-over-week.
Below, I call out a select few commodities and the respective week-over-week moves, alongside some additional company-specific commentary.
Wheat is a commodity that is widely used in the restaurant space but generally does not take up a large percentage share of any one company’s basket, with the exception of PNRA. The pizza concepts generally play down the significance of wheat prices for their overall basket (DPZ have it hedged out for the year) but, clearly, for PNRA wheat is a big driver of margin. For 2011 at least, PNRA is locked on its wheat exposure but – pending an update during this morning’s earnings call, any renewal of that contract will likely result in a step up in the company’s overall cost of sales. The chart below shows the trend in wheat prices over the past year.
Coffee is unrelenting in its weekly gains of late and will surely pressure many coffee producers into raising prices once more. Consumers have seen coffee prices increase in grocery aisles and coffee shops of late but, I suspect, another price increase may be on the cards.
Cheese is an important cost for pizza concepts and it will be fascinating to see how DPZ and PZZA fared during an extremely volatile quarter for cheese prices. Both companies are due to report earnings for 1Q11 on May 4th. CAKE, CMG, and DPZ have significant exposure to the spot cheese market. In the case of Domino’s, the company has a contract in place that reduces the volatility by a third.