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.