What happened

On Tuesday, the June consumer price index report fueled more worries about inflation, which could hit restaurants just as they are preparing for higher demand coming out of the pandemic. 

The index for food away from home rose 4.2% -- the highest 12-month increase since May 2009. For the week of July 12, shares of The Chefs' Warehouse (NASDAQ:CHEF), Shake Shack (NYSE:SHAK), and United Natural Foods (NYSE:UNFI) were down 10.7%, 13.6%, and 9.2%, respectively, as of 2:15 p.m. EDT on Thursday.

Four burgers heaped with toppings lined up on a restaurant counter.

Image source: Getty Images.

So what

One alarming indicator was a 4.5% increase in the beef index. Cost inflation in meat could be problematic for near-term margins at The Chefs' Warehouse, which sells center-of-the-plate products, such as beef, poultry, and seafood. 

While United Natural is hovering just above breakeven on a trailing-12-month basis, Shake Shack and The Chefs' Warehouse are still trying to recover their profitability coming out of the pandemic. Some restaurant stocks might appear to be good reopening plays, but higher demand for eating out might be offset in the near term by margin pressure from food-cost inflation.

Food Price Index Chart

Food Price Index data by YCharts

Now what

During the most recent earnings report, all three of these companies spoke to the concerns about rising cost inflation. While United Natural explained that inflation has historically benefited the business, management noted that suppliers are planning to raise prices in the coming months, which will have a larger impact on the business leading into fiscal 2022.   

Shake Shack cited increasing lumber and steel prices that will raise the cost to build stores. Management also expects beef inflation to negatively impact its food and paper costs through the second quarter. Food and paper comprise nearly a third of Shake Shack's operating costs. 

The Chefs' Warehouse has been hit particularly hard. Its gross margin fell 173 basis points year over year during the last quarter, driven by higher meat prices in addition to higher costs for cheese, dairy, and chocolate categories. 

Analysts have been steadily lowering their full-year earnings-per-share (EPS) estimates for Chefs' Warehouse and Shake Shack in recent quarters. EPS estimates for United Natural Foods have just started to decrease in the last month. Investors who bought these stocks when they were cheap a year ago may want to think about selling with food prices trending higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.