DES MOINES, Iowa -- Pizza companies -- especially larger ones -- should have protected their profits by hedging milk futures and options, said John Glass, an analyst at CIBC World Markets.
According to Dow Jones Newswires, Glass cut his third-quarter earnings estimate for California Pizza Kitchen Inc. by 2 cents a share because the chain had not hedged its cheese purchases when milk prices were low earlier this year (see related stories Hedging on Price, Cheese Market Rollercoaster Ride and Cheese Price Meltdown).
The roughly 25 percent climb in dairy prices over the past month (since June 23, block cheese prices rose 18 percent, from $1.23 per pound to $1.50) led Glass to warn that earnings of companies such as Pizza Hut, Papa John's and Chuck E. Cheese's are vulnerable for the rest of 2003.
In a recent investor conference call, a Yum! Brands (parent company of Pizza Hut) spokesman said Pizza Hut did hedge one-third of its cheese purchases for 2003. Dairy analysts contacted by PizzaMarketplace applauded the chain for the move, but added that hedging just one-third of the millions of pounds of cheese it buys per year is likely too little to provide long-term protection if prices continue climbing. (See related story ANALYSIS: Will Yum! Brands' multibrand strategy help or hurt Pizza Hut?)