Wednesday, October 31, 2007

Food Inflation Starting to Hit Restaurants

I mentioned in yesterday's Chipotle Mexcian Grill (CMG) entry

Hopefully analysts will question on the conference call just how much the rising food inputs are costing them, and if they are passing it along to the consumer and in what degree. And if their forecast for future food prices are part of the reason they are guiding so low in 2008.

Looks like analysts are starting to catch on - it did not matter today as the stock put on yet another 4% but I could see this one setting up for a big disappointment (despite suberb management) in 2-3 quarters down the road as global forces/realities overtake even the best managed company and expectations just get ratcheted to unreasonable levels in a momentum stock like this.
  • A Banc of America Securities analyst raised his price target on Chipotle Mexican Grill Inc. on Wednesday, following higher third-quarter profit, but warned that rising food costs will temper future results.
  • Barish has a "Neutral" rating on the stock, saying that the high stock price reflects these gains and his expectation that same-store sales may slow in 2008. Barish said food commodity costs remain challenging, and he is not sure whether higher menu prices can help offset that.
  • Morgan Stanley analyst Mark Wiltamuth said Chipotle's stock price is "priced to perfection," and said the company has delivered so far on lofty expectations. Looking ahead, however, Wiltamuth sees food costs dragging on results, with higher corn prices causing a rise in higher beef and chicken costs. "With Chipotle facing higher food costs ... we do not expect a continuation of the explosive restaurant margin gains for 2008," Wiltamuth wrote.
Again, I've been bearish on this group for a few months now (Tough Times Ahead: Restaurants?) but cannot short individual names so am locked out of some profit opportunities. Such as....

Buffalo Wild Wings (BWLD)
  • Analysts said Wednesday that higher commodity costs are weighing on Buffalo Wild Wings Inc., after the restaurant operator's third-quarter profit missed Wall Street expectations.
  • CIBC World Markets analyst Jeffrey D. Farmer cut his price target to $42 from $48, and said higher food costs are likely to persist in the fourth quarter and in 2008.
  • RBC Capital Markets analyst Larry Miller reiterated a "Sector Perform" or "Hold" rating and lowered his price target by $3 to $40, warning that expenses related to new store openings and a rise in food costs will pressure results going forward.
If only there were an UltraShort Restaurant ETF - I'd be rocking. BWLD was down 21% today.

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