Avoiding These Bullpen Candidates as Commodity Prices Surge
We and others have talked about the renewed climb in oil and other petrochemical prices, but we are also seeing upward trajectories in other commodities compared to levels in the first half of this year.
While most understandably think of coffee and milk prices when it comes to the businesses that power Starbucks ($SBUX) and its competitors, its move into energy refreshers to compete with Dutch Bros ($BROS), Black Rock Coffee Bar ($BRCB) and Black Rifle Coffee ($BRCC) as well as McDonald’s ($MCD) means sugar is another key commodity to watch. When we aggregate those three commodity prices together, it points to rising costs and incremental margin pressure in the coming quarters.
When it comes to the shares of Dutch Bros in the Portfolio’s Bullpen, they fell hard following the company’s recent quarterly earnings report. But what we see in those price trends reaffirms management’s outlook for greater margin pressure in the coming quarters. Management warned that higher coffee costs and rising occupancy expenses from more build-to-suit locations will continue to pressure profitability in the second half. But with around 25% of its total revenue stream coming from energy drinks, that means that sharp rise in sugar will be an added headwind for Dutch.
Factoring in the company’s shop expansion plans for the coming quarters likely means that, at least until those key commodity input prices decline, we’re going to keep BROS shares in the Bullpen for another time.
The upward climb in cocoa and sugar prices also means that downside risk is developing for shares of the Hershey Company ($HSY) following its climb over the last several weeks.
Cotton price have also resumed their upward move after falling in May, and that is another reason for us to avoid apparel-focused retailers. Should we see retailers signal a promotional holiday shopping season to lure in customers, apparel companies like Levi Strauss ($LEVI), which count cotton as a key input, are likely to feel a combination of pressures.
Fun fact: A typical pair of adult jeans requires about 1.5 to 2 pounds (roughly 0.7 to 1.5 kilograms) of raw cotton fiber, which translates to roughly 150 individual cotton bolls or the output of about two separate cotton plants.
Because of the way TJX ($TJX) procures its products across its store brands, much the way it avoided the impact of tariffs, it should not feel the pain of higher cotton costs.
At the time of publication, TheStreet Pro Portfolio was long TJX.
