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With the volatility in the commodity elevated and corn hitting record highs today the comments from CAKE management team highlight the risk to EPS this year.  I know they can’t update guidance weekly given the volatility in the commodity markets, but we can.  Coming into this year CAKE had 60% of their costs contracted for, leaving the balance to float for the balance of the year. 

As of the last update in April, they talked about 3.5% food cost inflation for the year.  The trends would be heavier in the first half (4.5%), which what it was in 1Q and looks like it will in 2Q, but falling to around 2.5% in the second half of the year.  The reason for the slower rate of change in 4Q primarily because 4Q10 had very high dairy prices last year and dairy is a commodity that is not contracted for.

CAKE is not expecting commodity costs to fall off a lot, rather as management stated today, “we're just not expecting them to be at the economically high levels that they were in the fourth quarter last year particularly with respect to the dairy component.” 

As the charts below illustrate, dairy costs are currently higher than they were in 4Q10.  Of course, there has been significant volatility of late and there is potential for a snap-back.  However, management may be forced to revise its expectations with respect to the dairy component of food costs if prices in cheese and milk markets remain anywhere close to where they are currently trending.  While there is still time for management to revise its view, we are watching this closely. 



Howard Penney

Managing Director