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BWLD – Taking advantage of the financial crisis in the poultry industry

The critical issues facing the industry stem from the components of chicken feed. The two key components, corn and soybean meal, increased more than 30% over the past 12-months. In addition, fuel costs rose another 20% or more.

BWLD has clearly been a beneficiary of lower prices as the company has seen a significant decline in chicken wing prices. Additionally, over the past 12-months nearly every major QSR chain has announced new chicken based products. McDonald’s has been very aggressive, adding a southern style chicken sandwich at breakfast and lunch. As a result, demand for fillets has increased, while the value of the by-product of fillet production (trim) has declined, resulting in greater supplier losses.

As we wrote earlier this week on July 29, the poultry operations of the two largest poultry suppliers, Pilgrim's Pride and Tyson, reported significant losses for the first three months of this fiscal year. Not surprisingly, the outlook for the next quarter is for more of the same.

Nearly all chicken suppliers need to significantly reduce production levels in an effort to generate higher prices. A return to profitability is necessary to ensure solvency for some companies. On the TSN conference call, the company alluded to the fact that a lot of its contracts are cost-plus, which means parts of the restaurant industry, will be seeing higher chicken prices in 2H08.

The marketplace for chicken processors remains volatile, which is not good news for the restaurant industry.

Helicopter Ben Sighting...

Here is an hourly overlay of the timing of Bernanke extending the duration of the bailout window with commodity prices. The correlation is marked to market, and crystal clear.


GMCR beat on the bottom line, but not the top…

COGS up 540 bps and SG&A down 610 basis points – You can only cut SG&A so much to make up for lower gross margins!. Despite incremental promotional expenses and a new manufacturing facility in TN, the company expects to get additional leverage on SG&A in 2009.

I still contend that by Q4 the signs of stress will be much more evident that they are today.

Did I mention they don’t generate enough operating cash flow to cover their capital needs and the stock trades at 17x EV/EBITDA!

Demand destruction at its best!

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Scary Charts: 2 year and 10 year US Jobless Claims

Within the context of my last posting that contextualizes where 448,000 fits within the historical US economic cycles, you can tell me where you think these charts are headed next.

Sometimes pictures of facts are more poignant than prose.
10 Year
2 Year

Watch Out, The (E) In Our RIPTE Model Is Getting Crushed

The is NO need to split atoms about this morning’s jobless report. It was a horrendous number, assuring us that the (E), as in employment, in our RIPTE Consumer Spending Model is heading into a darker hole.

Weekly jobless claims spiked this morning up to 448,000, taking the 4 week moving average up for the 2nd week in a row to 393,000. In order to understand macro, I always look back before I take a shot at looking forward. In a historical context to prior US recessions and consumer spending depressions (1), this run rate of unemployment claims is alarming.

Peaks in jobless claims in 1990 and 2001 were reported at 500,000 and 480,000, respectively. There is little doubt in my mind that this cycle sees those prints. The big question is can the US employment picture deteriorate to the 560,000 and 620,000 levels in claims that we saw at the peaks of 1972-74 and 1981-83 cycles, respectively.

The US Consumer is hostage to deteriorating RIPTE “Trends” until the facts bear out otherwise.

KSWS: Keep This One on Your Screen Today

Decent number out of KSWS this morning. EPS about in line, and revenue beat. But the company took down revenue guidance for 2H as I suspected. How I am doing the math, backing out the impact of the $30mm PSS settlement (which helps by about $0.58ps) KSWS took the year down as low as a loss of $0.08 (range of -0.08 to +0.07) versus the current consensus of $0.18. I think this is conservative guidance. Importantly, it masks the cash flow growth to come in '09. Check out the comment I posted yesterday afternoon for better context.

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