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Commodities, in general, went higher over the last week as economic concerns eased.  Weaker-than-expected post-holiday demand for beef led cattle prices lower but corn, chicken wings, and coffee all gained.

STOCK THOUGHTS

Commodity costs are front-and-center for the restaurant space in 2012, particularly 1H12, with some companies expected to see abatement in inflationary pressures while for others it is only beginning.  Below, we take you through some of our thoughts by commodity.

Chicken Wings – BWLD

When we first turned negative on Buffalo Wild Wings in October, it was largely due to what we saw as looming margin compression due to chicken wing price inflation coming back into the picture in 4Q11 or 1Q12 at the very latest.  Our timing was not spot on; BWLD took advantage of its last quarter of favorable wing prices to lower price and increase traffic, all-the-while experiencing only a minimal impact on margins.  In October, our view was also predicated on wing prices estimates for 4Q11 and 1Q12 of $1.20 and $1.40, respectively.  Now, with wing prices at $1.60 and processors still looking to cut production in the face of growing demand for chicken within the food service industry, those estimates seem like they could be conservative. 

We expect a revision to management’s previous guidance of only “modest” inflation heading into 2012” on the next earnings call (likely 2/8/12).  The company’s comparable-store sales growth has depended less on price and more on traffic, along with the rest of the industry, in recent quarters.  The company will likely not be able to sustain traffic trends and maintain margins in the first quarter of 2012. 

Beef – WEN, TXRH, JACK, CMG

Beef prices declined week-over-week as demand for beef after the holiday period was softer than excepted.  Consumer demand is a key driver of beef prices at this juncture with much of the supply concerns having been priced in over the last six months.  Changing emerging market diets and fading BSE-related restrictions on U.S. beef are bullish tailwinds over the longer-term.  For the first half of 2012, at least, beef should remain a headwind for WEN, TXRH, JACK, and CMG.  This is especially true for WEN as beef represents 20% the company’s spend.

Coffee – SBUX, DNKN, GMCR, PEET, THI, CBOU

Coffee costs are down slightly year-over-year but, despite significant price declines in the fourth quarter of 2011, climate- and market-related fears are keeping prices supported.  The euro-zone crisis will be a key driver from a market perspective, while weather in Latin America will also be monitored closely by coffee speculators.  Reports from Brazil are suggesting that there will be no significant increase in the size of the planted area in 2012 but that growers are investing in “improving yields”.

SBUX and DNKN are trading well today as DNKN was upgraded from Sell to Hold at Goldman Sachs because the stock price is reaching the analyst’s Price Target.  We remain unconvinced by the company’s business plan, particularly as it relates to growth and the ability of the company to grow its backlog on schedule, and retain our bearish view on the stock. 

WEEKLY COMMODITY CHARTBOOK - commod

CORRELATION TABLE

WEEKLY COMMODITY CHARTBOOK - correl

CHARTS

Coffee

WEEKLY COMMODITY CHARTBOOK - coffee

Corn

WEEKLY COMMODITY CHARTBOOK - corn

Wheat

WEEKLY COMMODITY CHARTBOOK - wheat

Beef

WEEKLY COMMODITY CHARTBOOK - live cattle

Chicken – Whole Breast

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

Chicken Wings

WEEKLY COMMODITY CHARTBOOK - chicken wing

Cheese

WEEKLY COMMODITY CHARTBOOK - cheese

Milk

WEEKLY COMMODITY CHARTBOOK - milk

Howard Penney

Managing Director

Rory Green

Analyst