Wingstop released a shocking earnings report three months ago: it was experiencing DEFLATION in bone-in chicken wing costs.
The chicken chain’s latest results confirmed the trend Thursday morning, and its stock rose 20% on the news.
“We are benefiting from significant deflation in bone-in wings,” said CEO Michael Skipworth.
Wingstop explained that bone-in chicken wing prices fell 19 percent year on year in the most recent quarter, at a time when many consumers may have forgotten what deflation is.
During the early days of the Covid-19 pandemic, chicken wings were a popular menu item. Customers who were stuck at home ordered them by the dozens because the tasty treat transported well for a contactless drop off at the door. With increased demand came what would become a pattern as the pandemic progressed: shortages and higher prices.
Now consider Wingstop’s most recent results: Despite a revenue miss, Wingstop easily beat earnings estimates thanks to lower wing costs.
Net income increased from $11.3 million to $13.3 million, or 44 cents per share, a year ago. Excluding items, the company earned 45 cents per share, well above the 36 cents per share expected by Refinitiv analysts polled.
Revenue increased to $83.8 million from $74 million the previous year, but fell short of the $86.1 million predicted by analysts.
Wingstop wasn’t the only one. Noodles & CO., a fast-casual restaurant chain, reported earnings on Wednesday afternoon. What did it say?
“We have recently seen key commodity prices, such as chicken, fall significantly from record highs,” said CEO Dave Boennighausen.
But here’s where things get strange. The United States Department of Agriculture raised its wholesale poultry price forecast for this year to a gain of 26 percent to 29 percent, up from a prior forecast of 20 percent to 23 percent.
According to the revised forecast, chicken prices are likely to rise further in the second half of the year. However, Pilgrim’s Pride, the country’s largest poultry producer, shed some light on this when it reported second-quarter earnings after the close on Wednesday.
The company provided inventory and pricing information during its conference call presentation. The situation varies greatly depending on the part of the chicken.
Here are a few examples: Chicken breast inventories are down 7% year on year, while dark meat inventories are down 15% from the five-year June average. However, wing inventories are significantly higher – they increased in the most recent quarter and are now 31% higher than the five-year June average.
All of this has an effect on pricing. Pilgrim’s Pride reports that chicken breasts, tenders, and leg quarters are trending higher
than in previous years, but wing prices have dropped.
The reason could be traced back to a cost-cutting measure implemented by many quick-service restaurants several months ago. As wing prices rose, the companies removed wings from the menu and replaced them with boneless wings made from chicken breast meat, according to Pilgrim’s Pride on its call. Thighstop, a virtual restaurant, was also launched by Wingstop.
“As a result, we saw a very rapid decline in the price of wings to where we are today,” Pilgrim’s Pride explained. The company also stated that there is some seasonality in wing prices because the football and basketball seasons are over, and these sporting events tend to boost demand for chicken wings.
Pilgrim’s Pride anticipates that wing prices will begin to rise again as those sports prepare for their upcoming seasons.
However, restaurants are currently experiencing some pricing relief, and investors will see how it plays out when KFC parent Yum Brands reports results next Wednesday and Popeye’s parent Restaurant Brands reports results on Thursday.
Noodles & Co. also made a strategic decision that aided its performance. They now use a more efficient cut of chicken breast, which reduces waste while increasing profit margins.
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