We recently removed McDonald's (MCD) as a Long. In this presentation, we will showcase why we removed MCD and highlight some of the pressures that this industry is facing ahead of the 3Q23 earnings period.
EVENT DETAILS:
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Changes to the names we will talk about today:
- Restaurant Brands (QSR) - Downgrading To A Long Bias
- Yum! Brands (YUM) - Downgrading To A Long Bias
- Wendys (WEN) - Adding As A Best Idea Short
- McDonald's (MCD) - Adding As A Short Bias
POSITION MONITOR SPOTLIGHT:
- McDonalds (MCD) - In July, McDonald's "Grimace" campaign took the internet by storm, racking up over 3 billion views on TikTok and highlighting the brand's marketing prowess. However, since that viral success, McDonald's has experienced a noticeable drop in traffic during August and September. Concurrently, the company's stock has declined by 15% over the past three months. This raises the question: Are the broader economic challenges the management has been highlighting throughout the year now affecting McDonald's performance? For FY23, sales, EBITDA, and EPS grew by 8%, 6%, and 10% respectively.
- Wendys (WEN) - Wendy's Co. (WEN) has adjusted its pricing strategy for the second half of 2023, increasing it from 5% to 7%. This change, initiated in May, was followed by a noticeable 1200bps drop in traffic in June. Could there be a correlation? As the quarter progressed, Wendy's appeared to respond to category softness by ramping up their promotional efforts. In July, they introduced a Buy 1, Get 1 Free Deal, which includes popular items like Dave's Single, Spicy Chicken Sandwich, 10-piece Chicken Nuggets, and Medium Chocolate Frosty. Subsequent months saw the addition of the $0.99 Frosty Cream Cold Brew, exclusively available through their app in August and September. Moreover, they've offered a $4 discount on In-App Delivery Orders over $20. While the market's projection for Wendy's Quarter-on-Quarter Same Store Sales (QoQ SSS) remains steady at 3.7%, the brand's aggressive promotions and slowing traffic the potential for in-line results.For FY23, sales, EBITDA, and EPS grew by 2%, 2%, and 1% respectively.
- Restaurant Brands (QSR) - Burger King's traffic for the quarter remained stable, performing notably better than McDonald's. The traffic decreased slightly in 3Q23 to -0.8%, down from +1.4% in 2Q23. Meanwhile, Tim Hortons' US business experienced a slowdown. Nonetheless, we are positive about QSR's growth prospects and are dedicated to improving brand image, operational effectiveness, and franchisee earnings. For FY23, sales, EBITDA, and EPS grew by 4%, 5%, and 6% respectively.
- Yum! Brands (YUM) - Looking at customer traffic, Taco Bell saw an increase quarter-over-quarter (QoQ), while both KFC and Pizza Hut experienced a slowdown. All three brands prioritize value, convenience, experience, and global growth, which are crucial factors for their success. In the second quarter of 2023 (2Q23), they opened 1,025 new outlets, leading to a 6% growth in the number of units. Specifically, Taco Bell in the US entered the third quarter (3Q23) with strong momentum, thanks to their new value-driven initiatives. For instance, they doubled their promotions in September, offering 11 deals compared to 5 in August. For FY23, sales, EBITDA, and EPS grew by 2%, 0%, and 2% respectively.
- Jack in the Box (JACK) - In FY 4Q23, JACK is expected to see a decrease from its peak pricing, which will reduce price by about 400bp. Consequently, the quarter-over-quarter (QoQ) same-store sales (SSS) growth rate will slow down to 3.5%, compared to 7.9% in the third fiscal quarter of 2023 (FY3Q23). Like WEN, JACK is now focusing on promotions offering better value. In August and September, Jack-in-the-Box significantly increased its promotional activities. Analysts are predicting a notable QoQ decline in SSS, from 7.9% to 3.5%, as customer traffic decreased from a growth of 5% to a decline of 0.4%. For FY23, sales, EBITDA, and EPS grew by 2%, 8%, and 11% respectively.
TOPICS TO BE DISCUSSED:
- Industry outlook for 2H23
- Updated company thesis with sales and traffic trends
- Key Takeaways ahead of the 3Q23 earnings period
- Discuss winners & losers and changes to the Position Monitor
