Dollar strength over the past week pressured commodity prices, as the table below shows. Corn is declining sharply and cattle prices are also yet to regain the ground lost since the “pink slime” scandal turned prices lower. Over half of the commodities in the table below are now red in the year-over-year column. We expect more red numbers in that column as we move through 2Q and into 3Q. Coffee is the biggest decliner, which is a positive for the coffee players as they look to extend contracts with suppliers. On the upside, the clear standout is chicken wings. +125% year-over-year and headed higher. We also think that the top-line was heavily boosted by weather in 1Q, declining from the 12.9% same-store sales growth in the first six weeks to 10.5% for the total quarter. If 8.9% comps and +50bps COGS drove down margins year-over-year, what will ~20% COGS inflation and mid-single digit comps do to margins?
GAS PRICES WATCH
COMPANY COMMENTARY ON GAS PRICES
WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.
BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.
CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.
DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.
SONC: We've seen a rising employment, declining unemployment – consumer confidence has improved somewhat, but at this point, I wouldn't say that we've seen a negative impact from gas prices that we can discern.
SUPPLY & DEMAND
Supply: Arabica harvests in Brazil get underway in June and good weather during growing season is fueling speculation that the country will produce a large quantity of coffee this year. The robusta harvest in the main coffee producing state in Brazil, have started harvesting this year’s crop.
Demand: Economic concerns, particularly, in Europe, have led to concerns about demand for coffee on a global scale. While emerging markets are increasingly driving demand growth, developed economies still account for a large proportion of coffee consumption and consumer confidence in those markets can impact coffee prices.
Comments: Falling coffee prices are good for company margins as long as demand is not falling so fast as to impact sales to a significant degree. Starbucks has its coffee needs locked into fiscal 2013. Peet’s has its coffee costs locked though 2012 at increasingly favorable prices throughout. Last year was a difficult year for Peet’s from a cost perspective.
Supply: Egg sets placements continue to contract at around the same rate, -5%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production. As the chart below shows, supply is not showing any clear signs of picking up.