Here is a look at BAGL’s inflation outlook as of the company’s most recent earnings call on March 3rd. 


BAGL is not a name I follow closely but, having observed a trend so far this earnings season, of companies missing on margins while meeting or exceeding top-line expectations, I decided that it would be informative to take stock of the inflation guidance for names that are due to report soon.  In general, the trend so far this earnings season has been for companies to raise their prior inflation guidance. 


It will come as no surprise, wheat costs are important for BAGL and are locked for the first half of the year.  Wheat represents 10% of the total commodity basket.  The trajectory of wheat prices as we head towards the second half will largely dictate the inflation that the company faces and the commissary margins at BAGL in 2H11.  Coffee costs are also significant for the company, comprising of 8% of the mix.  Coffee is 100% locked for the year. 


I believe that 2-3% overall commodity inflation guidance is more than likely conservative and will likely be revised higher.





Below, I have included some dialogue from the earnings call from March 3rd:


“And as I said, it's all about transaction growth and that's what we concern ourselves most about day-in and day-out, is ensuring that we continue to get that turnaround in transactions, clearly as we take pricing to hold margins in a time where commodity inflation's going up”



Question:  In terms of the commodities for next year, have you locked in any of the second half 2011 wheat contracts? And if so, do you have any commentary on that? And then in terms of other commodities, you mentioned wheat and coffee, but do you have any updates on maybe some of the other commodities, where they're trending, and what you're expecting for the year?


Answer:  Yeah.  Manny did mention that we did lock-in wheat only for the first half, and the reason for that is we – because in our work with our external team that helps us with our wheat buy – they're really indicating and we really feel that, that in the back half of the year that there's some opportunity I guess, in wheat prices weakening, if you will. So, it's the only reason we haven't locked deeper into the year than we have right now, but we do have the opportunity. So, we're covered on the upside and have the opportunity to lock-in at any time assuming that we feel that current estimates aren't where they – where we're expecting them to go.


The second piece – keeping in mind that wheat still only represents 10% of our total commodity purchase and that's an important piece for everyone to keep in mind as they think about our business trends. Overall, we're saying that our commodities will be in the – still in that kind of 2% to 3% range and that's an important element to know. And while there's been some short-term pressure on produce, as you all know, even that is in items that we think will work through quite quickly. Things like tomatoes and lettuce and some other items, because it's such a short growing season that we'll be back into the new fresh produce very quickly. So, we're working through that side of it. So, overall, as I said, 2% to 3% range and on a national basis, and we continue to monitor it very closely.



Question:  I was curious in terms of on the commissary side, last time wheat prices went up, commissary margins came under some pressure. Just curious what sort of guidance you might be able to provide us on how to think about that?


Answer:  Well, it's a really good question. It's one of the things I hadn't mentioned, and I meant to bring up. As we look at this cost team that we've pulled together, in addition to the packaging and inventory management and truckload, commissary is also another area, Bart, that we have – are really focusing on. So, well, last time, it did do that. We're, I would say, on top of the game, and we think that there's some efficiencies there, some good learnings that we've had. And I feel that that's an area that we can tighten up this year, and it might be another area for upside opportunity for us on a cost side as we sort of go through the year.



Question: And do you expect that 2% to 3% to be higher in the first half of '11 or the second half, or spread evenly throughout?


Answer:  We have it spread evenly through the year. Although on the second half, we do have – expect dairy to be a little bit better than in the first half. So, but for all intents and purposes, it's mostly even throughout the whole year.



Howard Penney

Managing Director

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