Commodities are going to be a major factor in the upcoming earnings season. Darden’s press release from yesterday morning is testament to that. On a week-over-week basis, there were more decliners than advancers among the commodities we monitor.
Chicken Wings – BWLD
It is telling that in a week where corn, wheat, beef, pork and dairy prices all declined, chicken wing prices still marched 4.2% higher. Per our notes published yesterday morning, BWLD is our favorite short idea in the casual dining space as supply and demand dynamics point to higher wing prices in 2012. If prices are up 50-60% year-over-year in the first quarter, we believe that BWLD will find it difficult to drive trends through promotion as it did in 3Q. Please see our notes from yesterday on DRI and BWLD for more details on this thesis.
Chicken prices are set to go higher in 2012 as QSR names are set to place a renewed focus on chicken, according to TSN CEO Donnie Smith. The hen flock on November 1st was 50.2 million, according to the USDA - the smallest since 1996.
Beef – WEN, JACK, CMG, TXRH
While the supply side of the beef equation points to a continuation of elevated beef prices, speculators are decreasing their net-long position according to CFTC data. For the week ended November 29th, net-long positions fell by 482 contracts, or 1%, from the week prior. From a demand perspective, many analysts are attributing the sell off over the last week to the Eurozone credit downgrade impacting the demand outlook. WEN, JACK, CMG, and TXRH are likely to face significant beef inflation through at least the first quarter of 2012. If the food service industry does shift its focus from beef to chicken, as TSN expects, it could hasten the decline in beef prices.
Dairy – CAKE, TXRH
Dairy moved sharply lower over the last week. Despite this move, prices remain up +12% year-over-year and will likely remain above 2010 prices for the remainder of the year. While the recent decline in dairy prices is good news, on the margin, for CAKE, we still believe that dairy prices will have a negative impact on gross margins during the fourth quarter. Earlier in the year, management guided to favorable dairy price comparisons, year-over-year, in the fourth quarter. We disagreed with that view from the beginning.
Chicken – Whole Breast