Burger Burdens: Buy puts on McDonald’s (NYSE: MCD), Restaurant Brands International (NYSE: QSR) and Wendy’s Company (NYSE: WEN)

The Trades:

Buy to open the March 15, 2019 put on McDonalds  (NYSE: MCD) with a strike price of $175 at $4.75 or lower. Symbol (MCD190315P175)

Buy to open the April 18, 2019 put on Restaurant Brands International (NYSE: QSR) with a strike price of $50.00 at $1.90 or lower. Symbol (QSR190418P50)

Buy to open the February 15, 2019 put on Wendy’s Company (NYSE: WEN) with a strike price of $17.00 at $.70 or lower. Symbol (WEN190215P17)

*Options are always risky but especially risky at this juncture in the market. Be patient filling these trades. At this writing, the futures are up slightly but wild swings are common. You might consider filling half your position today and a half later this week.

Rationale:

The quick-serve restaurant industry is barely growing and these burger players are fighting each other for a shrinking piece of a stagnant pie. According to restaurant research firm TDn2K, the entire industry grew just .8% in October, down from 1.2% and 1.8% in the prior two months.

While all three operators are primarily franchisors, their earnings will get hit as their customers (the franchisees) feel the brunt of lower customer traffic, sales, and higher expenses.

All three burger operators trade at valuation multiples higher than earnings growth. McDonald’s reports on January 29, Restaurant Brands reports on February 12 and Wendy’s Company on February 20th.

Promotions to lure in foot traffic are becoming increasingly aggressive:

  1. Restaurant Brands International, the parent company of the Burger King, Popeye’s Louisiana Kitchen, and Tim Hortons initiated a one cent Whopper deal. The trick is that the customer needs to be within 600 feet of a McDonald’s restaurant. A clear kick in the gut for stealing traffic.
  2. Many McDonald’s regional stores have retaliated by continuing their $1 “any-size” drink promotion which began last summer. Wendy’s is caught in the crossfire between its two larger competitors.
  3. Healthier fast-casual chains like SweetGreen, Chipotle and Boloco continue to lure customers away with healthier albeit, more expensive options.

Labor inflation and consistent staffing is a real problem. Keeping restaurants staffed is a continual problem for quick serve restaurants. In a tight labor market, workers are opting for better work conditions in retail and administrative roles. Increasing turnover, increasing wages and increasing customer expectations are pushing expenses upwards.

Industry sources note the increases in minimum wages and a tight labor market pushed up labor costs by 50 basis points (100 basis points is 1%) in recent periods.

Stock Talk

Joanne Zhang

Joanne Zhang

WEN filled @ 0.70
MCD filled @ $4.75

QSR still working

John N

John N

WEN filled at 0.70
QSR still waiting.
Not doing MCD since I have a trade with that in VT.

Julie

Julie

Was executed on WEN at .70

Todd Harrell

Todd Harrell

waiting on all 3

C.B. Cessna

C.B. Cessna

WEN filled @ .70 on TOS

Donald Lewis

Donald Lewis

WEN filled at .70 Fidelity

MCD filled at 4.75

Karl

Karl

MCD filled @ $4.00
others still working.

Linda McDonough

Linda McDonough

Has anyone been able to fill QSR? It looks like they’ve traded at $1.90.

JoeJB

JoeJB

Filled QSR at $1.90 this morning at about 9:37

Linda McDonough

Linda McDonough

Thank you! Appreciate that update.

Prasanna Kumar Y R

Prasanna Kumar Y R

How is the consumer spending? how it is going to affect restaurant stocks in 2019?

Linda McDonough

Linda McDonough

Prasanna,
The fast-food industry is so overcrowded right now that I don’t expect decent consumer spending to be enough to lift sales. This is partly a trade on the secular trend to more quick-serve healthy options (like Sweet Green and Pret a Manger).
Best,
Linda

Daniel Long

Daniel Long

WEN Feb 15 P17 are up 46% today (12/17/18). Still looking for more?
DL

Linda McDonough

Linda McDonough

Daniel,
Please see my trade alert this morning (12.18) suggesting selling the WEN puts.
Best,
Linda

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