A Fistful of Inflation

 | Feb 02, 2012 | 10:30 AM EST
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Wednesday was quite a day for earnings in the food-and-beverage sector. there were a couple of surprises in the mix, but a common theme ran throughout them all. Try and figure out what that is.

The biggest surprise by far was Green Mountain Coffee Brewers (GMCR), whose shares were recently up some 20% after a blowout quarter. Fiscal first-quarter revenue rose 102% to $1.16 billion, 9% above the consensus estimate of $1.06 Billion, while earnings of $0.60 per share trounced the $0.36 estimate. Sales of K-Cups jumped 115%, and brewer-and-accessory saw a 76% jump. Gross margins rose 405 basis points to just over 29%, but this was due primarily to price increases, a common theme in many of Wednesday's food-and-beverage earnings releases.

I must admit, I still don't understand the fascination with this company, or with its products, but on Wednesday some readers did their best to get it through my thick skull that this is not a fad -- that the convenience of the Keurig trumps the cost of K-Cups. I sat through David Einhorn's presentation at the 2011 New York Value Investing Congress, and it was compelling. While I'm still skeptical of the company, the bulls will have their day today. Fellow contributor Bob Lang should do well, given the strangle he revealed yesterday on Columnist Conversation.

On the other hand, Chipotle's (CMG) fourth-quarter numbers were not quite up to expectations. The company did post 24% revenue growth at $596.7 million, which was slightly above the consensus -- and, as with Green Mountain, the sales jump was aided by higher prices. Unsurprisingly, food costs were higher, rising 110 basis points to 32.1% of sales. The bottom line grew 24%, but EPS of $1.81 were just under the $1.83 consensus.

This was certainly not a bad quarter, but the market has become accustomed to Chipotle beating estimates. It also appears that growth is slowing. The company is forecasting mid-single-digit same-store sales growth in 2012, having recorded a blistering 11.2% in 2011. I admit that, so far, I've been wrong on Chipotle. Although I believed it to be a great concept, I've also thought it to be quite pricey -- a stance which has not worked to date.

Meanwhile, Hain Celestial (HAIN) said fiscal second-quarter sales grew 32%, to $385.6 million, just missing the $386.05 million average target. But EPS of $0.52 beat the consensus by $0.03. Gross margins fell 189 basis point to 27.37%, and input cost inflation rose 6.1%. Once again, we see rising costs playing a role.

Finally, Hershey's (HSY) fourth-quarter release was the least surprising, with both revenue ($1.56 billion) and earnings ($0.70) in line with consensus estimates. Price increases were the primary driver behind the 5.7% revenue growth, and gross margins fell 151 basis points to 40.27% as prices of sugar and cocoa rose. There you have it again -- higher input costs, and passing these on to the consumer. The company did increase its dividend by 10%, to $0.38 per quarter. That's good news for shareholders who have become accustomed to such increases by this dividend champion.

The biggest takeaway from all of these releases, then, is the rising input costs, and the price increases being handed off to the consumer. The Fed can institute its zero-interest rate policy (ZIRP) all it wants, but it can't keep inflation at bay, in my opinion. The question is, how much can the consumer take before he or she shuns the Chipotle burrito for Yum! Brands' (YUM) Taco Bell, or a box of K-Cups for a can of J.M. Smucker's (SJM) Folgers?

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