The Steakhouse Index Options

[dauss]

What Steakhouses Reveal about the Weakness of the US Economy

If you want to understand how high energy prices are impacting the economy, you could spend your days reading the Wall Street Journal or consulting with economists. Or you could go have a really expensive New York strip steak at the Palm or Morton's.

High-end steakhouses have expanded rapidly in recent years thanks to an economic expansion, the popularity of cholesterol-reducing statins such as Lipitor, and the low-carb/high-protein Atkins/South Beach diet crazes. You'll now find outposts of Morton's, Ruth's Chris, and several competitors in all the best suburban strip malls, edge-city shopping districts, and gentrified downtowns.

The financial results of these testosterone-filled cow palaces reveal much about several trends affecting the U.S. economy. First, they are a neat case study in the unexpected collateral effects of high energy prices. The high price of oil has spurred demand for ethanol, which in turn has boosted the price of corn. Corn is a primary "input"—or as we say in English, "food"—for beef cattle. The combination of higher grain and energy prices has led to burgeoning inflation in food. In the first quarter of 2007, food prices rose at an annualized rate of 7.1 percent, according to the Bureau of Labor Statistics. Like many businesses, steakhouses face the classic choice of swallowing the higher costs—and accepting lower margins—or raising prices.

Some beef boîtes are boosting prices. The New York Times recently reported that "The Palm steakhouse chain has raised the price of its steaks by $2, and side dishes have gone up 50 cents to help compensate for the price of the beef." The company's chief operating officer told the paper: "I don't think our customers have noticed." (Note: If customers haven't noticed a sly price increase, you might want to refrain from broadcasting it to the New York Times' readers.) At Peter Luger, the Brooklyn landmark whose very name causes this writer to salivate, the price of the iconic porterhouse for two has risen from $79.90 to $81.

But most of the big meat chains seem to be eating the costs, as shown by their falling margins. At Morton's margins fell from 9.8 percent to 9 percent in the first quarter, thanks in part to rising costs. Ruth's Chris reported that first quarter 2007 operating income fell from 13.8 percent of revenues to 10.1 percent of revenues. Rare Hospitality, which owns 280 Longhorn Steakhouse outlets, saw first quarter 2007 operating income fall to 8.6 percent of revenues, down from 9.8 percent in the first quarter of 2006.

To aggravate matters, the rising cost of beef appears to be accompanied by slowing demand. At Morton's steakhouses, same-restaurant sales rose by a meager 0.5 percent in the first quarter of 2007. For the year, Morton's expects same-restaurant revenue growth of between 1.5 percent and 3 percent. When Ruth's Chris reported first-quarter sales in April, it reduced expectations of same-store sales growth substantially. At Rare Hospitality, same-store sales actually fell 1 percent in the most recent quarter. For the remaining three quarters of fiscal 2007, the company sees same-store revenue growth of between 0 percent and 2 percent for its Longhorn Steakhouse outlets. In each instance, same-store growth is rising at a rate slower than inflation.

Not surprisingly, given the shrinking margins and slowing revenue growth, the stocks of the major public steakhouse companies have done poorly in recent months. Here's a three-month chart of Morton's, Ruth's Chris, and Rare Hospitality compared with the S&P 500.

A look at the six-month chart of the same stock and the S&P 500 shows how the steakhouses could function as economic indicators. Note the outperformance in the first quarter and the underperformance in the second quarter. Steakhouses thrive on expense accounts. Their sales are tied to the exuberance of (mostly) men in the corporate world, and their business is largely discretionary. (It's easy to lose sight of just how expensive steakhouses are. At the Michael Jordan steakhouse in New York, for example, a dinner of shrimp cocktail [$16.50], New York Strip [$38.50], hash browns [$7.50], and creamed spinach [$8.50], plus dessert, wine, tax, and tip easily tops $100 per person.) Their outsized sales and stock performance in the early part of the year are lagging indicators, as bonuses are paid out and entertainment budgets are set based on the prior year's performance.

But as the year unfolds, steak stocks become more like leading indicators. If profits are humming, M&E budgets are in rude health, and prospects look good, you'd expect businesspeople to use steakhouses for meetings, deal-closing dinners, and recruitment lunches. When business slows down a lot—as it has in many sectors of the economy—it becomes much harder to justify a $250 lunch for three. Wall Streeters and hedge-fund guys may still be splurging for Kobe, but think about all those real estate and mortgage brokers, car dealers and consumer products salesmen, retailers and contractors who may be nibbling on takeout burritos because of slowing demand.

Right now, the steakhouse damage seems confined to the chains. The next trouble spot, however, could be the highest quality, most—um—rarefied steak joints. For decades, Peter Luger has been the epitome of high-end, high-quality, consumer-unfriendly steak: no credit cards, brusque waiters, and a remote location. So long as the economics of the steak business were friendly, the restaurant could afford to be standoffish. If the portly waiters in Williamsburg start wishing you a nice day and loudly tout the fact that Luger's proudly accepts the American Express card, start praying.

Chains will only eat the cost for so much longer, then the prices will start to rise fast.

[dauss]

your "obvious" claims aren't so obvious. wal mart gets 1-2 trucks a week. it doesn't matter though, lets assume your number is correct. you didn't follow the logic I presented of cost of product vs cost of delivery. 76 million a year sounds like a lot, until you look at the fact that wal mart brings in 315 BILLION in revenues per year. again, assuming that the shipping companies pass on ALL increases in gas prices to their customers, even a 76 million dollar increase in one year (which is a huge exaggeration), we have an increase in cost compared to revenues of 0.024% (yes percent). it's a drop in the bucket. even all these numbers aside, have you noticed the prices of everything at wal mart increase dramatically since 1999? I sure as hell haven't.

and the $200 fuel cost I estimated is for a trip around 300 miles. I've been around the trucking industry a decent amount and they can get about 5mpg or so with a large load.

Took a while, but I found some numbers here.

In 2005 Wal-Mart operated 3,300 trucks that in 2005 drove 455 million miles to make 900,000 deliveries to its 6,500 stores. Fuel was $2.47/gallon. If we totally neglect the increased # of stores and keep the mileage the same, with gas at $2.81/gallon in 2006, it's costing Wal-mart an extra $152.6 million in extra fuel costs.

Nice comparison using revenue. I'm thinking of a company, in 2006, posted $160.1 billion in revenues....but didn't make a fucking cent. Actually they lost $12.7 billion. Any guesses? Who cares if a company makes a trillion billion dollars in revenue if they can't turn a profit?

In 2006, Walmart made a profit of $11,231 million. $152.6/$11,231 = a 1.4% hit to their profits.

sorry man I just don't buy it. go here: www.e85refuleing.com and tell me how many stations you find on there. when I click texas, I see 37 stations which have e85. when I click california, I see 5 stations. New York, 8. It says there's 1,227 locations total across the entire country. Are you really going to believe that corn production for this tiny amount of stations is affecting cereal prices!??! I've told you already it's not even the same type of corn. If we had ethanol stations on every corner, it'd maybe be plausible, but there's a pathetically small amount of them. I have had a flexfuel vehicle for over a year now, and have yet to find a damn E85 station remotely near anywhere I drive.

When was the last time you filled up your vehicle with 100% gasoline? You see that sign at the gas station that says "This product may contain up to 10% Ethanol"? You know, E10, Gasohol?

Half of the gasoline in the US contains ethanol. 140 billion gallons of gas was used in the US in 2004. If consumption remained the same in 06(which it didn't), and half had ethanol, and lets pretend that it was only E5(the lowest blend of ethanol to gasoline mixture sold), at the bare minimum 3.5 billion gallons of ethanol is in the gasoline. Factor in E7 and E10, and the 4.8 billions of gallons of ethanol produced in 2006, there's not much left for E85.

Ethanol boom may fuel shortage of tequila

Mexican farmers are setting ablaze fields of blue agave, the cactus-like plant used to make the fiery spirit tequila, and resowing the land with corn as soaring U.S. ethanol demand pushes up prices.

The switch to corn will contribute to an expected scarcity of agave in coming years, with officials predicting that farmers will plant between 25 percent and 35 percent less agave this year to turn the land over to corn.

How Ethanol Is Eating Our Lunch

On June 4, corn (No. 2 yellow, central Illinois) sold for $3.77 a bushel. A year ago, the price was just $2.25 a bushel. That's a 68% jump in price in a year. (The futures markets say prices will stay here, too, with corn for December delivery selling at $3.83 a bushel on June 4.)

Soaring demand for corn from ethanol producers isn't the only reason for the price increase, of course. There's rising demand from export markets for corn to use as animal feed and for human consumption. And there's increasing demand for corn sweeteners from the food industry.

But there's no getting around the corn-ethanol price connection. Corn prices are up despite projections of a record 12.5 billion-bushel corn harvest in the U.S. this year -- because ethanol producers will eat up 27% of the U.S. corn crop this year, according to the U.S. Department of Agriculture. Corn consumption by ethanol producers is projected to climb to 3.4 billion bushels in 2007, up from 2.2 billion bushels in 2006, when ethanol producers consumed 20% of the corn crop.

Supplies would be even tighter if high corn prices hadn't deterred some buyers. Corn exports, the U.S. Department of Agriculture says, are expected to drop by 10% in 2007. And corn purchases for animal feed will drop 3%.

The high price of corn has had a ripple effect on the price of other farm commodities too. With corn so profitable to plant, farmers have shifted acreage from soybeans, for example, to corn. In 2007, the acreage planted in corn will grow by 16% from 2006, while the acreage planted in soybeans will fall by 11%.

So it's not especially surprising that the price of a bushel of soybeans was up 36% as of June 4 from a year earlier. (Corn isn't just displacing food crops, either. In the southern U.S., the acreage planted in cotton is down 20% in 2007 as farmers switch to planting corn.)

And the ripples haven't stopped with the grain markets. The U.S. food industry is largely built on corn. It feeds the chickens, pigs and cows that wind up on our dinner tables. It's the source of the sweeteners in everything from soda to cookies to bread. And it's processed into starch for use in candies, soups, cake mixes, baked goods and, in the general economy, into plastic, paper, adhesives and textiles.

So if the price of corn is up, you'd expect the price of everything to be up. And so it is. If you grilled steak on this past Memorial Day, it cost 5.5% more than a year ago, according to the U.S. Labor Department. Think you can escape by barbecuing chicken? Forget it. Whole chickens cost 7.7% more than they did in May 2006.

Milk and cheese are up, too, since corn makes up the bulk of a dairy cow's diet. Milk prices are up about 3% from a year ago, or about 10 cents a gallon, according to the U.S. Department of Agriculture. But higher costs could push up the price of a gallon of milk by an additional 40 cents in the next few months to a national average of $3.78 a gallon.

Just because you don't see it doesn't mean it's not happening.