Trader Talk

Inflation bites into food retailers' results

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Food retailers like Red Robin Gourmet Burgers and Noodles & Company are sounding the alarm on inflationary pressures, raising the question: Is this the start to higher food prices for consumers?

Official data show inflation only gradually rising for the economy as a whole with the personal consumption index gaining 1.6 percent in June; however, a dozen food companies in the past few weeks have warned steeper price hikes hurt results last quarter.

Prices are rising for several restaurant staples like beef, seafood and cheese. But costs aren't up everywhere: Grain and vegetable prices, for example, have been declining.

This morning Red Robin said lower margins, which fell 1.3 percent from the same period a year ago, were mainly due to higher food and beverage costs.

Noodles & Company, which reported last night, posted a two percent drop in margins due to increased costs. During the company's conference call, CFO Dave Boennighausen said the cost of goods sold rose 70 basis points last quarter as a result of modestly higher pork, dairy and shrimp ingredient costs, as well as more promotional activity.

Wholesale food inflation rose 4.2 percent in the first six months of the year, its biggest rise since 2011; however, menu and grocery prices - what consumers are paying - were only up 2.2 percent and 1.6 percent, respectively, in the same period, according to the National Restaurant Association.

"Inflation remains a key concern for management," Goldman Sachs strategist David Kostin said last week in a research note. "Companies [have] noted the potential long-term impact of rising costs on margins despite hedges that reduce the near-term impact on profits."

Northeast-based grocery store Fairway Group highlighted upward price pressures too. "Approximately 140 basis points of the [190 basis points year-over-year] gross margin decline was attributable to lower merchandise margins primarily due to cost inflation in certain perishable departments, which for competitive reasons we were not able to fully pass on," the company said in its earnings release.

In the past couple weeks, Hillshire Brands, Pinnacle Foods, Sysco, Sprouts Farmers Market, Bloomin' Brands, Fiesta Restaurant Group, Texas Roadhouse and Jack In The Box all referenced increasing commodity costs in general.

Other food retailers have been more specific. For Papa Murphy's, Papa John's, Dean Foods and Brinker International's Chili's restaurants, higher dairy prices soured results.

At Red Robin and Wendy's it was heftier beef prices.

Annie's noted greater organic wheat costs.

What's this mean for investors? Is this cause for concern?

The bad news is it is starting to affect margins, so the answer is yes if you are investing in food and restaurant companies. Red Robin, for one, is down as much as 21 percent today.

For consumers, it is not yet a concern, but it bears careful watching.

First, not everything has seen prices rise: Cereal prices, for example, have been dropping. And for those commodities that have seen higher prices, the rise is still comparatively modest; for the most part in the mid-single digits.

Second, food prices can be very volatile. That's one reason they are stripped out of certain overall inflation gauges. Some recent price hikes have been circumstantial given ongoing droughts in parts of the U.S. that have sent beef prices soaring upwards of 10 percent and the deadly Porcine Epidemic Diarrhea (PED) pig virus, which has led to a nearly 30 percent surge in your pork patty.

Finally, for the time being, these companies are absorbing the inflationary pressures rather than passing them on to consumers.

If that changes, this story will get much more attention.