Wednesday, September 19, 2007

Tough Times Ahead: Restaurants?

Good article here from on the multiple squeezes on the restaurant stocks. I have been looking at Chipotle Mexican Grill (CMG) due to demographic trends in the US, it's great fundamentals, management style, and move from a regional to national brand - however I think this might be a better play in a few quarters so I am going to hold off. Chipolte just spiked up to $115 today, so let's check back down the road to see if this caution was misplaced. Add to the fact its now trading at nearly 60x 2007 earnings and its hard for me to get excited at these valuations, but for the next 5 years it's one to watch.

In general retailers and restaurant stocks are not super high growth areas but these chains that have good growth in a region than expand nationally can offer great opportunities - think Panera Bread (PNRA) about half a decade ago.

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation. Oh nevermind, CPI came out today and that's all imaginary - except for restaurants. On an anecdotal level, a local pizza chain had a great special I used to get all the time, 1 medium 1 topping for $5.49 - it just went up 3 weeks ago to $5.99. That's 9% inflation to me. But probably -0.4% to CPI.

Perhaps 50 or 75 basis point cut will make this all go away. Right? Hello?
  • Soaring prices for wheat and other commodities that go into making bread, tortillas and baked goods will likely start hurting profits at casual dining eateries. And that comes on top of elevated prices for other commodities.
  • "If you are any one of the major restaurant chains, your costs of buns, bread and other breakfast items is going to rise," says Georges Yared, chief investment strategist at Minneapolis-based Yared Investment Research.
  • Other companies are already feeling the pinch. Sara Lee (SLE) last week announced that it would be raising the suggested retail prices of baked goods by 5% because of the elevated costs of wheat. The news comes hot on the heels of another 5% price hike in April. Mark Goldman, a spokesman for Sara Lee in suburban Chicago, says the firm says it has tried to be conservative with past and current price increases.
  • And there is plenty of good reason to believe the price strength in wheat won't be disappearing anytime soon, because the supply/demand balance is keeping the market particularly tight. "We are at a 30-year low on wheat inventories," explains Mike Woolverton, a grains economist at Kansas State University in Manhattan, Kan. "Demand for wheat has been increasing around the world as countries develop.
  • Futures prices for the grain have skyrocketed to record levels of over $9 a bushel earlier in the month. Recently they have pulled back to around $8.69, but that's still more than double the long-term average, which Woolverton estimates at around $3.50 a bushel.
  • It may be welcome news on the farm, but it's not going to be much fun for restaurant chains, especially those which target the budget-conscious. While the impact on the price of bread alone might not have been too much to swallow, it comes at a time when other restaurant costs -- including other food items and energy -- are rising also. And on top of that, consumers are feeling a dent in the pocketbook from higher gasoline prices.
  • Firms facing increases in costs face the choice of raising prices charged to consumers or watching their profit margins get squeezed, with the likely outcome being a combination of the two. Either way, with a softer economy, the profits are likely going to come under pressure.
  • The employees could also feel the pain, as some diners will undoubtedly choose to leave lower tips to partially offset the rising tab.
Takeaway: The more one reads about the incessant demand on world stock's of 'everything' from the growth in the Far East as consumers there move to more Western styles of eating/consuming - the more one feels bearish about anything domestically related. While there will be ebbs and swings in wheat, corn, and other commodities - I believe the long term decade long trend is firmly up. How to play this on the long side? Have to still say we are in early innings of the agriculture run. As more Chinese and Indians move from rural to urban life, not only is there less domestic supply of agricultural product, but there is that much more demand by these new age consumers who use to subsist on their own growings. No more. This is a sea change. And consumers worldwide will pay for it - and those consumers whose currency sucks wind will pay the most; literally.

No positions


If you are thinking to work from home, make sure that you don't need to risk personal finance. Before going for this, having secured loans is a good idea. And there getting a business insurance is mandatory because neither homeowners insurance nor any other mortgage loan should make up for any kind of loss suffered in business. Why should you refinance home mortgage just because your work is not going well.

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012