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Yesterday, we publish a series of quick notes on the balance of companies that are reporting this week looking specifically at inflation expectations.  A common theme for this earnings season is that top line sales trends remain strong, but nearly every management team has underestimated the impact of inflation on margins and earnings.  This has led to guidance being reduced, as we saw last night with TXRH, PEET and last week with CAKE.

CPKI, BAGL and CBOU all stand out as companies that will need to raise guidance for inflation expectations for the balance of this year.  Interestingly, if you search CPKI’s most recent quarterly earnings transcript for the word inflation, you will not find it even once.  This alone is an indication that the company may be underestimating the impact of inflation on the P&L, at least publicly. More importantly, the most recent guidance from the company, of 2.5% inflation for the year, was not even in the ballpark of reality, putting CPKI at risk of having to guide down. 

For BAGL, I believe that 2-3% overall commodity inflation guidance is more than likely conservative and will probably be revised higher.  Given surging coffee costs (not to mention that SBUX and PEET both increasing inflation expectations), CBOU will bring down guidance; it will be interesting to see by how much. 

Below is a run-through of the news from the restaurant space along with the price action from yesterday and our fundamental view on select names.

  • GMCR announced earnings post-close yesterday, beating the Street’s expectation of $0.39 in EPS by three cents. 
  • GMCR announced a 7.1m shares secondary offering (an additional 404k shares is for holders) through BofA.
  • GMCR’s price target was raised to $85 from $55 at KeyBanc.
  • DNKN filed a $400m IPO through JPMorgan, Barclays, Morgan Stanley, BofA, and Goldman Sachs.  Prior speculation was for the deal to be in the range of $500-750m.  
  • PEET reported a strong EPS beat of $0.41 versus consensus $0.34.  A cautious tone was struck by management regarding coffee costs and management lowered guidance by 10 cents.  The new guidance is for EPS in the range of $1.43-1.50 versus prior guidance of $1.53-1.60 and Reuters $1.56.
  • PEET was cut from “Outperform” to “Neutral” at Robert Baird.  The twelve-month price target is $48.
  • PZZA reported Q1 EPS $0.64 versus consensus $0.60.  Domestic SSS were +6.1% vs consensus +1.8% (company +6.7% vs consensus +2.4%; Franchise +5.9% vs SA +1.7%) and International SSS grew +5.6%.
  • DIN gained 5.7% on accelerating volume on the back of strong earnings released yesterday morning. 
  • YUM and Little Sheep have not yet reached a deal according to Business China, citing a Little Sheep spokesperson speaking yesterday.
  • CMG is far from in the clear with Immigration officials.  A Chipotle attorney has confirmed to the WSJ that ICE officials have visited 20-25 restaurants and the government intends to interview Chipotle employees. A former ICE lawyer says that the government's behavior suggests it is looking for something that goes beyond its investigation of the company's I-9 forms, which has already led to Chipotle's dismissing hundreds of workers.

EARNINGS COMMENTARY AND TALES OF THE TAPE - stocks 54

Howard Penney

Managing Director