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Analyst: Commodity prices have peaked

Restaurants could experience turnaround as gas prices decrease and commodities max out

Arguing that commodity prices appear to have peaked and gas prices are coming down, at least one analyst is predicting that restaurant operators will have a more positive outlook during the upcoming earnings season.

In a restaurant industry update report issued Wednesday, Bart Glenn of D.A. Davidson & Co. said restaurant stocks followed by the firm outperformed expectations in June in part because of lower gas prices and an easing of some food commodity costs.

“It appears commodity prices have peaked, at least for the near term,” Glenn wrote. “Although food inflation will remain an issue through 2012, it is encouraging that prices appear to be normalizing.”

Glenn cited the Producer Price Index for foods, which he said fell 1.4 percent sequentially in May. He also noted declines in the prices of staples like coffee, corn, milk, wheat, soybeans, live cattle and lean hogs.

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Lower gas prices also will offer a boost, although Glenn argued that this year’s gas-price hike did not cause the “psychological panic” of past inflationary times.

“Although painful prices at the pump are clearly not beneficial to sales trends, we think the actual impact has been overblown,” he wrote.

However, he added, “A reduction in gas prices not only aids consumer spending power, but also means lower production and logistic costs of commodities of supplies.”

The national unemployment rates in May of 9.1 percent, however, continued to reflect a weakened economy, Glenn said. Employers added only a net of 54,000 jobs in May, compared with an average of 220,000 added per month in the three months prior.

However, Glenn said all but 14 states reported improving or flat conditions and the situation is improving for restaurant brands that faced the highest level of unemployment exposure, such as BJ’s Restaurants and Jack in the Box, which both are heavily concentrated in California, a state with 11.7 percent unemployment.

Still, earnings reports coming later this month will largely be “in line to modestly better than expectations,” he predicted, and restaurant operators are likely to focus on upgraded forecasts rather than reported results.

“We anticipate most companies will reiterate or raise guidance given the benefits of lower gas and commodity prices,” he said.

Still, with companies like Chipotle Mexican Grill recently disclosing plans for price increases in certain markets, Glenn said the debate over pricing power will be revisited.

“We believe most companies will raise prices more than initial forecasts,” he said, “but that increases will lag inflation.”

Brands like Buffalo Wild Wings, for example, that have experienced year-over-year improvement in food costs are likely to resist pricing, Glenn argued.

“There is little to gain by talking up price increases due to the media’s ability to alarm customers,” he wrote.

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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