Page 1
Restaurants
Matt McGinley (212)-446-9421
[email protected]
Please see the analyst certification and important disclosures at the end of this report. Evercore ISI and affiliates do and seek to do business
with companies covered in its research reports. Investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Josh Schwartz (212)-446-5630
[email protected]
Evercore ISI
April 4, 2017
Page 2
Evercore ISI
Coverage Summary
April 4, 2017
2
Stock Ticker RatingBase
Case
% Chg to
BaseInvestment Thesis
Wendy's WEN Outperform $16 18.0%
WEN has made substantial progress on streamlining the company, divesting non-core assets, and improving the quality of the store
base. We like the momentum in the business from both a menu and store 'image activation' (remodel) standpoint. With increasing
AUVs, LSD unit growth, high incremental margins and G&A reductions combined with leverage and buybacks, we expect a mid 20s
EPS CAGR from '17-'20 and a 7%+ FCF yield in 2018 based on the current share price.
YUM! Brands YUM Outperform $75 18.0%
Now with the spin being complete, YUM has a cleaner asset-light business model. YUM is now targeting a 98% franchised system by
2018 and to offset the resulting lower operating profits with signficiant G&A and CapEx reduction. The net result including buybacks is
to grow EPS at 15% annually through 2019. Additionally, the hope is that the higher franchised target will allow YUM to increase focus
on marketing and helping franchisees grow the business allowing YUM to reach 7% system sales growth target.
Starbucks SBUX Outperform $66 12.9%
Core holding in the large cap restaurant space. In the U.S., its technology innovation, rewards program, and improvement in food
quality will likely result in mid single digit comp growth in its most established market. In Asia, we expect unit growth in China and
changes in the ownership structure in Japan to enable operating profit to nearly triple in this segment by 2021. Even without increasing
leverage, we expect operating profit to CAGR at double digits, and EPS to CAGR at mid-teens through 2021.
YUM China YUMC In-Line $30 10.3%
YUM China is a unique asset which gives investors access to a pure-play owned China story. The growth opportunity in China is
compelling given continued urbanization and a shift towards the consumer. KFC is the largest food concept while PHCD is the largest
full-service concept. However, performance has been extremely volatile due to company-specific and macro issues. We believe that
the trajectory is up and to the right but emerging competition and cost inflation pose significant risks.
Domino's DPZ In-Line $195 4.7%
Domino's is the premier player in a mature, but fragmented U.S. pizza category. It is a technology company as much as it is a pizza
company, which has resulted in impressive organic growth and share gains. The int'l growth opportunity is large, requires no capital
and is very high margin. While we like the company, the valuation gives us pause as it is the most expensive name in the group.
McDonald's MCD In-Line $132 1.8%
The global leader in the QSR space - driven by marketing and quality store locations accumulated over decades, MCD has the highest
AUVs and the highest profit per store. After several years of challenging operating results, McDonald's streamlined its operating
stucture, optimized the capital structure and improved execution. With this structure in place, MCD is now modernizing its U.S. store
base to reaccelerate traffic growth which is necessary to achieve double digit EPS growth.
Jack In The
BoxJACK In-Line $103 1.1%
2017 has gotten off to an uneven year for JIB brand competitively, but believe this is a stable regional QSR burger concept. Qdoba's
comp has turned negative and margins have delevered putting in question the growth story. JACK is pulling all of its financial levers by
increasing JIB franchising % to 90% (with a long-term goal of 95%), increasing leverage to 4.0x and increasing shareholder returns
which should lead to high teens EPS growth. However, Qdoba weakness could pressure the stock price.
Chipotle CMG In-Line $375 -17.2%
Single greatest restaurant success story over the last 20 years until its foodborne illness incidents in 4Q15 . More than a year removed,
CMG's recovery flatlined at 20% below peak levels. While sales appear to have gained momentum recently, CMG will need to prove it
can continue to regain sales while also offsetting wage inflation and expanding margins in order to justify its premium multiple. CMG
still has the opportunity to double its store base albeit at much lower returns vs. pre-crisis levels.
Panera Bread
Co.PNRA In-Line $230 -18.6%
PNRA has invested heavily over the last few years to improve the customer experience by adding store labor and technology, and
making continued progress on menu innovation. The continued rollout of delivery shows great promise, but with operated margins
expected to be flat due to necessary topline investments and a difficult macro-environment, we think that there are profit growth
headwinds preventing mid-to-high-teens growth in 2017.
Dunkin' Brands DNKN Underperform $49 -10.2%
Solid regional franchise, but competition in morning daypart will likely challenge comps in '17. DNKN is lagging behind competition in
execution and adaptation of technology. Its core market in the Northeast only has a few years left of growth, and while Dunkin' has good
visibility over the next several years, there is a risk the store growth plan slows as the unit economics are not as compelling outside of
its established markets.
Page 3
Evercore ISI
Portfolio Manager Summary – 6 Charts That Summarize Restaurants
Source: BLS, BEA, FactSet, Consensus Metrix, Census Bureau, Evercore ISI
Restaurant Share of Wallet There are secular changes occurring in the way
people are spending at restaurants
-4%
-2%
0%
2%
4%
6%
8%
10%
4.50%
4.75%
5.00%
5.25%
Q1
-05
Q3
-05
Q1
-06
Q3
-06
Q1
-07
Q3
-07
Q1
-08
Q3
-08
Q1
-09
Q3
-09
Q1
-10
Q3
-10
Q1
-11
Q3
-11
Q1
-12
Q3
-12
Q1
-13
Q3
-13
Q1
-14
Q3
-14
Q1
-15
Q3
-15
Q1
-16
Q3
-16
Yo
Y C
ha
ng
e in
Res
tau
ran
t Sale
s
Sh
are
of
Wa
lle
tShare of Wallet Category Growth
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Unit Inflation Traffic / Mix
Restaurant Capacity / Demand Restaurant sales CAGR at 5%. This is mostly driven
by inflation and unit growth. There is no indication
that the industry is over stored.
Valuation – EV/EBITDA - NTM QSR valuation at peak, and above relative averages
vs. the S&P. CDR valuations have dipped after a post
election bounce.
41
(80)
(32) (30)
QSR Median Fast CasualMedian
Casual DiningMedian
Overall
-4%
-2%
0%
2%
4%
6%
8%
Feb
-02
Ju
l-0
2
De
c-0
2
Ma
y-0
3
Oc
t-0
3
Ma
r-0
4
Au
g-0
4
Ja
n-0
5
Ju
n-0
5
No
v-0
5
Ap
r-0
6
Se
p-0
6
Fe
b-0
7
Ju
l-0
7
De
c-0
7
Ma
y-0
8
Oct-
08
Ma
r-0
9
Au
g-0
9
Ja
n-1
0
Ju
n-1
0
No
v-1
0
Ap
r-1
1
Se
p-1
1
Feb
-12
Ju
l-1
2
De
c-1
2
Ma
y-1
3
Oc
t-1
3
Ma
r-1
4
Au
g-1
4
Ja
n-1
5
Ju
n-1
5
No
v-1
5
Ap
r-1
6
Se
p-1
6
Fe
b-1
7
Series3 Restaurants Less Affordable
Food at Home CPI Food Away from Home CPI
2.5%
3.2%
4.0%
5.4%
5.9%
4.8%
4.1%
2.3%
1.5%
0.3%
0.0%-0.1%
0.1%
1.3%
1.8%2.1%
3.5%
1.1%1.1%
2.0%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17e
2Q
17e
3Q
17e
4Q
17e
2015
2016
2017e
2018e
Comp 2-Yr Stacked Avg.
Grocery Deflation Grocery deflation could make it difficult for restaurants
to take pricing. Value menus have returned with much
vigor.
SSS Trends Sales expected to continue to be weak going into
2017..
Basis Point Change In Margin In CDR and QSR labor inflation will be fully offset
by food deflation. That is not the case among the
average fast casual operator.
April 4, 2017
3
13.8x
9.4x
10.8x
3x
6x
9x
12x
15x
Limited Service Casual Dining S&P 500
Page 4
Evercore ISI
State of the Consumer
Source: Bureau of Economic Analysis, Federal Reserve Board, Evercore ISI
60%
70%
80%
90%
100%
110%
120%
130%
140%
15.0%
15.5%
16.0%
16.5%
17.0%
17.5%
18.0%
18.5%
19.0%
Q1-8
0
Q3-8
1
Q1-8
3
Q3-8
4
Q1-8
6
Q3-8
7
Q1-8
9
Q3-9
0
Q1-9
2
Q3-9
3
Q1-9
5
Q3-9
6
Q1-9
8
Q3-9
9
Q1-0
1
Q3-0
2
Q1-0
4
Q3-0
5
Q1-0
7
Q3-0
8
Q1-1
0
Q3-1
1
Q1-1
3
Q3-1
4
Q1-1
6
Ho
useh
old
Deb
t % o
f DP
I
Fin
an
cia
l O
bli
gati
on
s %
of
DP
I
Financial Obligation % of DPI HH Debt % of DPI
$0
$100,000
$200,000
$300,000
$400,000
$500,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Average Assets Per Household
Real Estate Durable Goods Bonds Stocks
19.5%
20.0%
20.5%
21.0%
21.5%
22.0%
22.5%
23.0%
23.5%
16.0%
16.5%
17.0%
17.5%
18.0%
18.5%
19.0%
19.5%
Ja
n-0
4
Sep
-04
Ma
y-0
5
Ja
n-0
6
Sep
-06
Ma
y-0
7
Jan
-08
Sep
-08
Ma
y-0
9
Ja
n-1
0
Sep
-10
Ma
y-1
1
Ja
n-1
2
Sep
-12
Ma
y-1
3
Ja
n-1
4
Sep
-14
Ma
y-1
5
Ja
n-1
6
Sep
-16
Retail Goods (RA)
Healthcare (LA)
Consumer Services, Recreation & Travel (LA)
4Q162.8%
4Q165.6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
3Q
83
3Q
85
3Q
87
3Q
89
3Q
91
3Q
93
3Q
95
3Q
97
3Q
99
3Q
01
3Q
03
3Q
05
3Q
07
3Q
09
3Q
11
3Q
13
3Q
15
Pers
on
al S
avin
gs R
ate
Real C
on
su
mer
Sp
en
din
g Y
oy C
han
ge
Real Consumer Spending YoY Change vs. Personal Savings Rate
Real Consumer Spending (LA)
Personal Savings Rate (RA)
Wallet Share: Goods vs. Services Healthcare and consumer services, including restaurants,
recreation & travel outpace retail growth in consumer wallet
share.
Household Debt & Debt Service Despite a low rate environment, the consumer has delevered
post-recession.
Savings Rate & Real Consumer Spending Household Wealth Consumer wealth slumped in the recession, but reached record
highs in 2016.
April 4, 2017
4
Page 5
Evercore ISI
Consumer Income, Spending, and Confidence
Source: Census Bureau, BLS, Evercore ISI
Household Income Distribution Dollar Spend by Income Quartile
Consumer Confidence
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Bottom20%
20-40% 40-60% 60-80% Top 20%
Education
Apparel
Cash & Miscell
Entertainment
Health & Personal Care
Food & Bev & Tobacco
Insurance & Pensions
Transport
Housing
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
<$
5k
$5
-10
k
$1
0-1
5k
$1
5-2
5k
$2
5-3
5k
$3
5-5
0k
$5
0-7
5k
$7
5-1
00k
$1
00
-150
k
$1
50
-220
k
>$
20
0k
2.8%
-0.2%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Q1
-20
00
Q3
-20
00
Q1
-20
01
Q3
-20
01
Q1
-20
02
Q3
-20
02
Q1
-20
03
Q3
-20
03
Q1
-20
04
Q3
-20
04
Q1
-20
05
Q3
-20
05
Q1
-20
06
Q3
-20
06
Q1
-20
07
Q3
-20
07
Q1
-20
08
Q3
-20
08
Q1
-20
09
Q3
-20
09
Q1
-20
10
Q3
-20
10
Q1
-20
11
Q3
-20
11
Q1
-20
12
Q3
-20
12
Q1
-20
13
Q3
-20
13
Q1
-20
14
Q3
-20
14
Q1
-20
15
Q3
-20
15
Q1
-20
16
Q3
-20
16
Median Weekly Wage (FT Workers) Avg. Hours Worked Per Employee
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Au
g-1
1O
ct-
11
De
c-1
1F
eb
-12
Ap
r-1
2J
un
-12
Au
g-1
2O
ct-
12
De
c-1
2F
eb
-13
Ap
r-1
3J
un
-13
Au
g-1
3O
ct-
13
De
c-1
3F
eb
-14
Ap
r-1
4J
un
-14
Au
g-1
4O
ct-
14
De
c-1
4F
eb
-15
Ap
r-1
5J
un
-15
Au
g-1
5O
ct-
15
De
c-1
5F
eb
-16
Ap
r-1
6J
un
-16
Au
g-1
6O
ct-
16
De
c-1
6
Wage growth have accelerated slightly recently to just under 3% providing capacity for higher spending
Median Wages & Hours Worked YoY
April 4, 2017
5
Page 6
Evercore ISI
Restaurant Sales Indicators
April 4, 2017
6 Source: Census Bureau, Bureau of Economic Analysis, National Restaurants Association, Evercore ISI
6.8%
5.8%
5.0%5.1%4.6%
2.8%2.7%
4.5%
3.2%
6.2%
7.3%7.6%
9.0%8.7%
8.0%
6.8%6.6%
5.8%5.5%
4.4%5.0%
Restaurant Retail Sales Growth Restaurant retail sales continued to moderate in 4Q, but have ticked up
so far in 1Q17 through February.
Evercore ISI Restaurant Survey Our restaurant survey shows continued moderation throughout March
reaching the lowest levels since 2010.
National Restaurants Association Performance Survey The National Restaurants Association survey also show a slowdown in sales
throughout the quarter.
Personal Consumption Expenditures - Restaurants Spending at limited service restaurants grew 4.8% in 4Q16 lower than the
7% in 4Q15. CDR spending increased by 3.3% in 4Q16.
After signs of stabilization in January, restaurant sales weakened in February, and our survey shows
continued moderation through March.
97
98
99
100
101
102
103
104
105
Mar-
11
Jun-1
1
Sep-1
1
Dec-1
1
Mar-
12
Jun-1
2
Sep-1
2
Dec-1
2
Mar-
13
Jun-1
3
Sep-1
3
Dec-1
3
Mar-
14
Jun-1
4
Sep-1
4
Dec-1
4
Mar-
15
Jun-1
5
Sep-1
5
Dec-1
5
Mar-
16
Jun-1
6
Sep-1
6
Dec-1
6
44
46
48
50
52
54
56
58
60
62
01-J
an
-16W
22-J
an
-16W
12-F
eb
-16W
04-M
ar-
16W
25
-Mar-
16W
15
-Ap
r-1
6W
06-M
ay
-16W
27-M
ay
-16W
17-J
un
-16W
08-J
ul-
16W
29-J
ul-
16W
19-A
ug
-16W
09-S
ep
-16W
30-S
ep
-16W
21-O
ct-
16W
11-N
ov-1
6W
02-D
ec-1
6W
23-D
ec-1
6W
13-J
an
-17W
03-F
eb
-17W
24-F
eb
-17W
17-M
ar-
17W
Sales growthhas been muted since August
Sales Continue to Fall
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17 Q
TD
Limited Service Full Service
Page 7
Evercore ISI
Potential Factors Impacting Restaurant Sales
April 4, 2017
7 Source: Bureau of Economic Analysis, Evercore ISI
0
50,000
100,000
150,000
200,000
250,000
300,000
Jan Feb Mar Apr
2017 YTD
Avg. 2006-2016
Employment Growth vs. EVR ISI Restaurants Survey Our restaurants survey ticked down as payroll growth has moderated.
Contributing factors to the recent slowdown in restaurant sales include a slowdown in payroll growth, an
increase in gas prices, growing gap between food at and away from home and now, the tax refund delay.
Gas Prices vs. EVR ISI Restaurants Survey Restaurant sales moderation intensified in 2Q16 coinciding with an increase
in gas prices. However, gas prices have been relatively stable since last May.
20
30
40
50
60
70
0.5%
1.0%
1.5%
2.0%
2.5%
No
v-1
1
Fe
b-1
2
Ma
y-1
2
Au
g-1
2
No
v-1
2
Fe
b-1
3
Ma
y-1
3
Au
g-1
3
No
v-1
3
Fe
b-1
4
May-1
4
Au
g-1
4
No
v-1
4
Fe
b-1
5
Ma
y-1
5
Au
g-1
5
No
v-1
5
Fe
b-1
6
Ma
y-1
6
Au
g-1
6
No
v-1
6
Fe
b-1
7
EvrI
SI
Re
sta
ura
nt
Su
rve
y R
ea
din
g
No
n F
arm
Pa
yro
ll G
row
th
Non-Farm Payrolls YoY Growth EVR ISI Survey Reading
30
40
50
60
70
$1
$2
$3
$4
$5
Dec-1
1F
eb
-12
Ap
r-12
Ju
n-1
2A
ug
-12
Oc
t-12
Dec-1
2F
eb
-13
Ap
r-13
Ju
n-1
3A
ug
-13
Oct-
13
Dec-1
3F
eb
-14
Ap
r-14
Ju
n-1
4A
ug
-14
Oct-
14
Dec-1
4F
eb
-15
Ap
r-15
Ju
n-1
5A
ug
-15
Oct-
15
Dec-1
5F
eb
-16
Ap
r-16
Ju
n-1
6A
ug
-16
Oct-
16
Dec-1
6F
eb
-17
EV
RIS
I R
esta
ura
nt
Su
rvey R
ead
ing
Avera
ge G
aso
lin
e P
rice p
er
Gallo
n
Average Gasoline Prices Evercore ISI Monthly Reading
Food at Home vs. Away from Home CPI Gap (bps) The gap is currently ~428bps, down slightly vs. the past three months but
still near multi-year highs.
U.S. Cumulative Tax Refunds Tax refunds were slow to be issued resulting in a peak delay versus 10
year average of 47mn returns
-4%
-2%
0%
2%
4%
6%
8%
Feb
-02
Ju
l-02
Dec-0
2
May-0
3
Oct-
03
Mar-
04
Au
g-0
4
Jan
-05
Ju
n-0
5
No
v-0
5
Ap
r-06
Sep
-06
Feb
-07
Ju
l-07
Dec-0
7
May-0
8
Oct-
08
Mar-
09
Au
g-0
9
Jan
-10
Ju
n-1
0
No
v-1
0
Ap
r-11
Sep
-11
Feb
-12
Ju
l-12
Dec-1
2
May-1
3
Oct-
13
Mar-
14
Au
g-1
4
Jan
-15
Ju
n-1
5
No
v-1
5
Ap
r-16
Sep
-16
Feb
-17
Series3 Restaurants Less Affordable
Food at Home CPI Food Away from Home CPI
Page 8
Evercore ISI
Restaurant Industry - Fragmented Market Share, Consolidated Market Cap
Source: Technomic, Bloomberg, FactSet, Evercore ISI ** 2015 data
The restaurant industry is exceptionally fragmented both
globally and in the U.S. We estimate that the global restaurant
industry is $2.1T, and the U.S. is $815B in total foodservice sales.
This means that the largest global chain, McDonald’s, has just over
4% share in the U.S. and Globally. In the U.S., the top 100 chains
have only ~25% market share, and going all the way down to the
top 1500 restaurant concepts, only 45% of the total category is with
chain concepts.
There are ~350 publicly traded restaurants globally, and ~90
are in the U.S. In dollar terms, the combined market cap of all
restaurant companies is $475B, but this market cap is highly
consolidated in U.S. based companies. While U.S. based
restaurant chains make up only 20% of global restaurant revenue,
U.S. chains are two-thirds of the market capitalization of the global
industry. McDonald’s alone makes up 22% of publically traded
global market cap. The five largest U.S. listed restaurants,
McDonald’s Starbucks, YUM!, Chipotle, and Restaurant Brands
International, make up ~75% of U.S. restaurant market cap.
33%
26%
8%
4%
4%
9%
$300B US Market Cap
McDonald's
Starbucks
YUM!
RBI
Chipotle
McDonald's
Starbucks
Chipotle
Next 10
Bottom~75
YUMC
66%
11%
7%
4%
3%
8%
U.S.
UK
Japan
France
Canada
All Other
$475B Global Market Cap
9%
4%
5%
10%
8%
55%
Top 5
#5-10
#11-20
#20-100
#100-1500
All Other Restaurants
$815 US FoodService Industry
Total
System
Sales
U.S.
System
Sales
Int'l
System
Sales
Total
System
Sales
U.S.
System
Sales
Int'l
System
Sales
1 McDonald's 82,715 35,837 46,877 21 Buffalo Wild Wings 3,643 3,567 76
2 Starbucks 25,560 13,936 11,624 22 Arby's 3,540 3,451 89
3 KFC 24,213 4,001 20,212 23 Papa John's 3,479 2,816 663
4 Burger King 18,554 9,000 9,554 24 IHOP 3,402 3,255 147
5 Subway 17,000 11,500 5,500 25 Jack in the Box 3,339 3,338 1
6 Pizza Hut 11,602 5,510 6,092 26 Outback Steakhouse 3,174 2,566 608
7 Domino's 10,193 4,709 5,484 27 Popeyes Louisiana Kitchen3,060 2,720 339
8 Wendy's 9,862 8,777 1,085 28 Denny's 2,736 2,548 188
9 Taco Bell 9,414 9,100 314 29 TGI Fridays 2,647 1,567 1,080
10 Dunkin' Donuts 8,303 7,624 678 30 Panda Express 2,569 2,550 19
11 Tim Hortons 6,800 669 6,131 31 Red Lobster 2,536 2,411 125
12 Chick-fil-A 6,294 6,291 3 32 Hardee's 2,514 2,165 350
13 Applebee's 5,129 4,739 390 33 Cracker Barrel Old Country Store2,289 2,289 -
14 Panera Bread/Saint Louis Bread Co.4,837 4,796 41 34 Texas Roadhouse 2,191 2,145 45
15 Chipotle Mexican Grill 4,475 4,420 56 35 Cheesecake Factory, The 2,014 1,914 101
16 SONIC Drive-In 4,414 4,414 - 36 Jimmy John's Gourmet Sandwiches2,005 2,005 -
17 Dairy Queen/Orange Julius4,337 3,531 806 37 Whataburger 2,001 2,001 -
18 Chili's Grill & Bar 4,124 3,406 719 38 Baskin-Robbins 1,872 588 1,285
19 Little Caesars 3,850 3,500 350 39 Carl's Jr. 1,842 1,496 346
20 Olive Garden 3,805 3,743 62 40 Golden Corral 1,740 1,740 -
U.S. Restaurant Market Cap 5 U.S. stocks comprise ~75% of the market cap of
the ~90 U.S. listed restaurant chains.
Global Restaurant Market Cap U.S. listed restaurants make up 2/3 of global
restaurant market cap.
U.S. Restaurant Sales Consolidation The restaurant market is highly fragmented, with the
largest chain with only 4% market share.
System Sales By Concept – Top 40 U.S. Chains**
April 4, 2017
8
Page 9
Evercore ISI
Restaurants In Perspective: 12% of Retail, 3.7% of GDP
Consumption $12.2 Trillion
Investment$3.0 Trillion
Government $3.2 Trillion
Net Exports($.5) Trillion
Retail Sales $5.5 TrillionRetail Sales ex. Autos & Gas $3.3 Trillion
Discretionary
Consumer Electronics, Furniture, Home
Improvement, Motor Vehicles
Mixed
32%
Staples
U.S. Gross Domestic Product $17.9 Trillion
eComm, General Merch, Miscellaneous
Retailers
Clothing, Health & Personal Care,
Gasoline
25% 18%Grocery Restaurants
13% 12%
Food
$1,780B $1,350B $995B $705B $656B
Source: Bureau of Economic Analysis, Evercore ISI
April 4, 2017
9
Page 10
Evercore ISI
U.S. Share of Stomach and Restaurants Per Capita
Source: Technomic, BEA, Evercore ISI
$141
$179
$501
$650
$691
$696
$706
$834
$1,025
$1,038
$1,087
$1,508
$2,186
$2,188
$3,682
Convenience Stores
Caterers
Midscale
Supermarket
Bars and Taverns
Fast Food
Recreation
Lodging
Casual Dining
Fast Casual
Fine Dining
Business Café
Hospital Cafeteria
Transportation
College Cafeteria
Average Unit
Volume Restaurants Per
Capita
AUV and Restaurants Per Capita There is one restaurant for every 458 people in the U.S.
79%74%
68%
62%60% 59%
55%
4%8%
12%18%
19% 20%
22%
14% 15% 16% 17% 18% 18% 20%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1960 1970 1980 1990 2000 2010 2016
Gov't
Full Service
Limited Service
Schools
Food - At Home
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$2,200
$2,400
$2,600
$2,800
195
9
196
1
196
3
196
5
196
7
196
9
197
1
197
3
197
5
197
7
197
9
198
1
198
3
198
5
198
7
198
9
199
1
199
3
199
5
199
7
199
9
200
1
200
3
200
5
200
7
200
9
201
1
201
3
201
5
At Home Restaurants
Dollar Share of Stomach 55% of food today is consumed or prepared at home. Food-at-home has been losing
share for decades – mostly to food eaten at a quick service restaurant. $1.4T was spent
on food at both grocery and in restaurants in the U.S. in ’16.
Spend Per Capita – Inflation Adjusted The average American spends 32% more than they did on food than they did 60 years ago
($4,600). Spending at home has remained flat, while restaurant spending has nearly doubled.
71.3k
6k
56k
31.8k
17k
7.5k
1.8k
6k
9.83k
1k
17k
7.3k
3.6k
5.7k
7.3k
0% CAGR
April 4, 2017
10
Page 11
Evercore ISI
Restaurant Spend By Format and Growth
Source: Technomic, Evercore ISI
5.4%
26.2%
5.4%
22.2%
2.5%
5.5%7.4%
9.7%
1.9% 4.6% 3.2% 3.0%
1.2% 1.2% 0.7%
$0
$50
$100
$150
$200
Fast
Casu
al
Fast
Fo
od
Mid
scale
Casu
al
Din
ing
Fin
e D
inin
g
Bars
an
d T
avern
s
Reta
il
Tra
vel &
Leis
ure
Bu
sin
ess
Sch
oo
ls
He
alt
hc
are
Ven
din
g
Ca
teri
ng
Go
v't
Oth
er
Food Alcohol Series3
Full Service$290B
35% Share
Limited Service$256B
32% Share
All Other Away From Home$268B
33% Share
Away From Home Food Consumption in the U.S. If we broaden the definition of the restaurant category to include everything in the
Foodservice category, we believe more dollars are actually spent outside of the home than at
grocery. For example, food items purchased at hotels (falls into leisure services), company
and school cafeterias (falls into services), a sandwich bought at the deli counter of a grocery
store would count as being consumed at home. We believe total foodservice spend is
~$815B, which would be about 60% of the dollars spent on food in the U.S.
18.7k
42.0k
64.7k
87.8k
176.1k
305.9k
0
50
100
150
200
250
300
350
Fine Dining FastCasual
Bars andTaverns
Midscale CasualDining
Fast Food
U.S
. R
es
tau
ran
ts (
tho
usa
nd
s)
YoY Growth in Unit Counts The growth in unit counts is highly cyclical. Limited service
formats average 2.3% growth, while full service formats
average 1.3%. 2015 growth ran 30% higher than average.
U.S. Restaurants By Format There are 695k restaurants and bars in the U.S. 45% of
those restaurants are fast food concepts.
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Q1
-94
Q4
-94
Q3
-95
Q2
-96
Q1
-97
Q4
-97
Q3
-98
Q2
-99
Q1
-00
Q4
-00
Q3
-01
Q2
-02
Q1
-03
Q4
-03
Q3
-04
Q2
-05
Q1
-06
Q4-0
6
Q3
-07
Q2
-08
Q1
-09
Q4
-09
Q3
-10
Q2
-11
Q1
-12
Q4
-12
Q3
-13
Q2
-14
Q1-1
5
Q4
-15
Q3
-16
Yo
Y U
nit
Gro
wth
Full Service Limited Service
April 4, 2017
11
Page 12
Evercore ISI
Restaurant Supply – Restaurant Unit Counts
Source: BLS, Evercore ISI
2.2%
2.6%
0.5%
2.2%
2.7%
0.1%
1.3%
2.3% 2.4%2.2%
2.7%
1.2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Unit Inflation Traffic / Mix Unit Inflation Traffic / Mix
24 Year Avg. 2016
Casual Dining
Quick Service
Casual Dining Revenue Drivers Unit growth in casual dining peaked in the 1990’s, where growth
rates averaged 3.5%. In the past 5 years, unit growth has remained
very subdued at 1.2%, ~100bps lower than average
2016 Drivers of Revenue vs Long-Run Average The current rate of unit growth in CDR is lower than its historical average,
and QSR current unit growth rates are equal to historical averages.
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Unit Inflation Traffic / Mix
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Unit Inflation Traffic / Mix
Quick Service Revenue Drivers Unit growth in quick service peaked in the 1990’s, where growth
rates averaged 3.1%. Over the past 5 years, unit growth was at
approximately the historical average industry rate of 2.1%.
Despite concept growth in fast casual and among some of the QSR
chains, there is no indication that there is an excess supply of
units. The unit growth rates seem to be pretty healthy in the U.S.
restaurant industry, with the current casual dining growth rate of 1.3%
being well below the historical averages of 2.2%. In QSR (including fast
casual), the growth rates have accelerated out of the recession, but even
these rates are comparable to the long run average of 2.2%. As an
industry, the long-run nominal sales growth rate is around 5%. On
average, roughly half of the growth in sales comes from inflation
(pricing). The inflation driven growth has been fairly consistent over
decades despite changes in the economy or food prices. The other big
driver of growth in the industry is unit expansion, which accounted for
more than 40% of quick service sales growth over the past 24 years, and
~36% in 2016.
April 4, 2017
12
Page 13
Evercore ISI
Restaurant Demand – Restaurant Sales Growth
Source: BLS, BEA, Census Bureau, Evercore ISI ** U.S. Census Bureau Retail Sales Ex. Autos and Gas
(42)
(14)
9 12
33
(50)
(40)
(30)
(20)
(10)
-
10
20
30
40
Fuel Related Grocery Restaurants Housing Medical
Basis
Poin
t C
ha
ng
e I
n W
alle
t S
ha
re
Restaurant Share of Wallet Share of wallet shifted materially in 2014 and
2015 to restaurants
Fuel Savings and Spending Shift Fuel savings funded medical care, not restaurants
-4%
-2%
0%
2%
4%
6%
8%
10%
4.50%
4.75%
5.00%
5.25%
Q1-0
5Q
3-0
5Q
1-0
6Q
3-0
6Q
1-0
7Q
3-0
7Q
1-0
8Q
3-0
8Q
1-0
9Q
3-0
9Q
1-1
0Q
3-1
0Q
1-1
1Q
3-1
1Q
1-1
2Q
3-1
2Q
1-1
3Q
3-1
3Q
1-1
4Q
3-1
4Q
1-1
5Q
3-1
5Q
1-1
6Q
3-1
6
Yo
Y C
ha
ng
e in
Res
tau
ran
t Sale
s
Sh
are
of
Wa
lle
t
Share of Wallet Category Growth
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
The restaurant industry has had outsized growth over the last few years; we believe some of the
factors related to being in the later stage of the economic cycle, and others related to a change in
spending pattern. Restaurant spend is a pro-cyclical, employment driven category – with total
employment and disposable income the two largest factors at play. Prior to the last recession, access to
revolving credit seemed to play a larger part in driving demand in the industry, but statistically, credit
appears to be driving much less of the demand today. Strong employment out of the recession is clearly
driving demand in the category.
There do appear to be factors outside of employment that are driving a change in spending
habits in the category. Since the mid-2000s, restaurant sales have been materially and durably
outpacing spend in retail. A part of this trend includes the overall shift in spending away from goods and
into services. The restaurant category also tends to have more inflation than the rest of retail because
labor makes up ~30% of sales, vs 10-15% for a typical retailer. Over the past three years, there has
been a bigger shift in wallet share, where Americans are more willing to spend a greater percentage of
disposable income on food away from home. The one factor that does not appear to be at play in driving
demand is oil related savings. 2016 oil related savings went mostly to fund higher medical care costs
and into savings – restaurant wallet share came at the expense of grocery.
$200
$250
$300
$350
$400
$450
$500
$550
$600
$650
$700
$750
105,000
110,000
115,000
120,000
125,000
130,000
135,000
140,000
145,000
150,000
Q1-9
1
Q2-9
2
Q3-9
3
Q4-9
4
Q1-9
6
Q2-9
7
Q3-9
8
Q4-9
9
Q1-0
1
Q2-0
2
Q3-0
3
Q4-0
4
Q1-0
6
Q2-0
7
Q3-0
8
Q4-0
9
Q1-1
1
Q2-1
2
Q3-1
3
Q4-1
4
Q1-1
6
Fo
od
Aw
ay F
rom
Ho
me ($
B)
To
tal E
mp
loyed
(000)
Total Employed Food Away From Home
Restaurant Less Retail** Restaurant growth has been outpacing retail
growth since 2006
Employment & Eating Out A strong labor market results in more away
from home consumption
April 4, 2017
13
Page 14
Evercore ISI
Framing The Industry
Source: *NPD, Evercore ISI
Quick Service Restaurant (QSR)
• Mature segment, large national
chains
• Low U.S. growth, more Int’l growth
• Drive-thru dependent – 50-70%*
Equity Drivers / Debates
• Refranchising stores, capital
structure
• Global growth opportunities
• Health of franchisee – wage
headwinds, access to capital to grow
Fast Casual
• Newer concepts, higher growth
• Generally company owned /
licensed
• Smaller stores without drive-thru
Equity Drivers / Debates
• Pace of growth – with or w/o
franchise
• New concept crowding? “The
Chipotle of….”
Casual Dining (CDR)
• Negative traffic, low store growth
• Generally company owned
• Losing share to more convenient /
faster options
Equity Drivers / Debates
• Gas impacts creating near-term
headwinds
• International growth enough to
offset domestic weakness
QSR Fast
Casual CDR
April 4, 2017
14
Page 15
Evercore ISI
Industry Characteristics By Format
Source: Technomic, Company Data, Evercore ISI
Quick Service Restaurant (QSR) Fast Casual Casual Dining (CDR)
Category
Consolidation
Unit Growth
Sales / Comp
Growth ‘16
Key Themes
&
Drivers
High – very high in Burger and Mexican.
Less so in Pizza and sandwich. The top
550 chains control 59% of the units and
82% of the revenue.
Top chains average 320 units.
Very High – several categories like Chipotle
and Panera skew the results. The top 350
chains control 64% of the units and 82% of
the revenue.
Top chains average 78 units.
Very Low – dominated by Mom &
Pops. The top 580 chains control
11% of the units and 33% of the
revenue.
Top chains average 55 units.
Low: growing ~1.5% Very High: growing ~9% Very Low: growing <1%
Sales Growth: ~4%
Comp Growth: ~2%
Sales Growth: 7%+
Comp Growth: 1-2% ex. Chipotle
Very Low: growing <1%
Comp Growth: ~0-1%
Largely employment driven. Least
cyclicality in the restaurant space. Macro Drivers
Convenience Driven Category: Most
sales occur at the drive thru
Relevance Issue? Perception issue as
being less healthy or fake is losing
Millennials and Moms
Value Can Move Sales: Increasingly
promotional. Food deflation enabling the
return of dollar price points.
Share of Stomach: Taking Share From
At Home
Health Driven Category: most operators
focus on quality of the ingredients / better
for you perception
Very Much on Trend: riding the theme of
natural and better for you. Probably not
taking share from heavy QSR users
Sales respond much less to promotion
and innovation (new products).
Share of Stomach: Taking Share From
QSR and CDR.
Employment likely drives sales. An emerging
category, but held up slightly better than QSR
and CDR in last recession.
Employment, credit availability, and
less time to eat.
Experience Driven Category:
requires good people and frequent
menu innovation
Traffic has been generally
negative since the recession
Most chains trying to highlight
value: Kids eat free on Tuesday, 2
for $20, etc.
Share of Stomach: Chains losing
share to local competition. 2015
was a great year for the category,
growing 8%, but public CDR chains
averaged 3%.
April 4, 2017
15
Page 16
Evercore ISI
Restaurant Channel Share
Source: Technomic, Evercore ISI
Total $ Spend Occasions Segment Level
Fast CasualAverage
Ticket PP
Share of
Total $
Spend
10-YR
Change
in Share
Share of
Total
Occasions
10-YR
Change in
Share
Share of
Segment $
Share of
Segment
Occasions
Asian Noodle 10.25$ 0.9% 68 1.0% 60 10.2% 10.2%
Bakery Café 10.30$ 1.7% 93 1.9% 80 20.1% 20.0%
Burger 10.73$ 0.8% 73 0.8% 61 9.0% 8.6%
Chicken 10.80$ 1.0% 64 1.0% 53 11.2% 10.6%
Mexican 9.42$ 1.9% 157 2.3% 150 21.9% 23.8%
Pizza 12.45$ 0.2% 15 0.2% 11 2.6% 2.2%
Specialty 10.80$ 0.6% 53 0.7% 44 7.4% 7.0%
Sandwich 10.23$ 1.5% 123 1.7% 108 17.6% 17.6%
10.28$ 8.7% 645 9.5% 567 100.0% 100.0%
MidscaleAsian 15.08$ 0.0% 1 0.0% 0 0.1% 0.1%
Family Style 11.15$ 8.1% (157) 8.2% (139) 92.7% 93.3%
Seafood 12.23$ 0.0% (0) 0.0% (0) 0.1% 0.1%
Italian 14.86$ 0.2% (1) 0.1% (1) 2.0% 1.5%
Mexican 13.01$ 0.0% (2) 0.0% (1) 0.4% 0.3%
Specialty 11.35$ 0.4% (6) 0.4% (6) 4.7% 4.7%
11.25$ 8.8% (166) 8.8% (146) 100.0% 100.0%
Casual DiningAsian 19.20$ 1.3% 13 0.8% 6 3.6% 3.8%
Italian 19.44$ 4.6% (52) 2.6% (27) 12.7% 13.1%
Mexican 18.59$ 1.6% (30) 1.0% (16) 4.5% 4.9%
Seafood 28.47$ 3.0% (44) 1.2% (16) 8.4% 6.0%
Specialty 20.88$ 1.3% (14) 0.7% (7) 3.5% 3.4%
American 18.73$ 19.4% (34) 11.7% (27) 54.0% 58.2%
Steak 25.19$ 4.8% (21) 2.1% (10) 13.3% 10.6%
20.58$ 36.0% (182) 19.7% (96) 100.0% 100.0%
Fine DiningAsian 103.82$ 0.1% (0) 0.0% (0) 2.7% 1.9%
Italian 59.47$ 0.1% (0) 0.0% (0) 1.3% 1.7%
Seafood 63.06$ 0.4% (0) 0.1% (0) 9.3% 11.0%
Steak 76.20$ 3.5% 20 0.5% 2 86.7% 85.4%
75.50$ 4.1% 19 0.6% 2 100.0% 100.0%
Quick Service RestaurantsAsian Noodle 8.84$ 0.2% (0) 0.2% (1) 0.4% 0.3%
Bakery Café 7.49$ 0.0% (1) 0.0% (1) 0.0% 0.0%
Burger 7.05$ 16.8% (252) 26.9% (389) 39.7% 41.3%
Chicken 9.27$ 3.7% 1 4.5% (8) 8.7% 6.9%
Coffee Café 5.05$ 5.5% 256 12.3% 445 13.0% 18.8%
Family Casual 10.38$ 0.9% (126) 1.0% (115) 2.2% 1.5%
Frozen Dessert 5.66$ 1.7% (1) 3.3% (8) 3.9% 5.1%
Mexican 7.45$ 2.4% (2) 3.7% (10) 5.7% 5.7%
Pizza 11.87$ 5.7% (48) 5.4% (49) 13.5% 8.3%
Sandwich 8.23$ 4.2% (93) 5.8% (118) 9.9% 8.8%
Specialty 6.73$ 1.3% (50) 2.1% (74) 3.0% 3.3%
7.79$ 42.5% (316) 61.4% (327) 100.0% 100.0%
8.0%
8.1%
33.1%
3.7%
39.0%
9.6%
7.9%
19.6%
0.6%
62.2%
Share of Occasions (Outer Ring)
Share of Revenue (Inner Ring)
Quick Service Restaurants
Fast Casual
Midscale
Casual Dining
Fine Dining
645
(166) (182)
19
(316)Fast Casual Midscale Casual
DiningFine Dining Quick
ServiceRestaurants
10-Year Market Share Change Fast casual concepts have been taking share from casual dining and QSR
formats for a decade.
Restaurant Revenue Share and Occasion Share Despite losing share to Fast Casual chains, QSR dominates the category in
both total revenue and shopping occasions.
April 4, 2017
16
Page 17
Evercore ISI
Ownership vs Franchise Economics
Source: Technomic, Evercore ISI *** Assumes the franchisor does not own the real estate, which they sometimes do.
Owned Restaurant P&L Pure Franchisor Model P&L
Rate % $$$ Rate % $$$
Restaurant Sales 100% $1,000 Royalty Fees (~5%) 100% $50 Revenue vs Fee model - high operating contribution with
ownership, less volatility with franchise
Food & Paper 30% $300
Payroll & Employee 28% $280 Franchisor has no exposure to commodity, wage or rent
Occupancy 7% $70 changes ***
Other (ultil., maint., credit, etc.) 16% $160
Restaurant Operating Profit 19% $190 Restaurant Opex 0% $0
Advertising 5% $50 Advertising (administration) 5% $3 Fee model is generally limited to HQ expense and
G&A 3% $30 G&A 4% $2 advertising administration
D&A 1% $10 D&A 1% $1
Corporate SG&A 9% $90 Corporate SG&A 10% $5
Operating Profit 10% $100 Operating Profit 90% $45 Revenue model has much higher EBIT $$$, Franchisor
model has a much higher rate
Balance Sheet & Returns Balance Sheet & Returns
Working Capital High Working Capital Low
PP&E (or rent) High PP&E (or rent) Low
Ability to Carry Debt Low(er) Ability to Carry Debt High
ROIC Low ROIC Very High
Trading Multiples Low Trading Multiples High
6.3%
15.6% 16.8%
35.8%
52.2%
59.0%
83.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Co
nte
mp
ora
ry C
DR
Up
scale
CD
R
Fin
e D
inin
g
Tra
dit
ion
al C
DR
Fast
Ca
su
al
Mid
sca
le
Qu
ick S
erv
ice
Franchise % By Restaurant Sub-Industry
Comparing Restaurant P&L’s – Owned vs Franchised
The ownership structure of a restaurant concept is the single most important
determinant of its profitability and trading multiple for publically traded restaurants.
Franchising tends to work best in QSR chains where the lack of table service means the
experience is less defined by interaction with employees; QSR kitchens also tend to have
fewer items and less variability, and this consistency allows for less oversight of the franchise.
There are two overarching reasons why a company would or would not want to
franchise. The first is that franchising enables growth at a faster rate because the
franchisees fund the capex and may have local market knowledge greater than that of the
national chain. As the national QSRs evolved and grew 30 to 50 years ago, most chains ran
their own stores and also franchised in local markets. As the industry matured, the second
reason for franchising evolved, which is the idea that it is better to de-risk the P&L and just
collect a franchise fee. As the franchisee is responsible for buying food, hiring employees,
and spending to maintain the restaurant (capex), moving to a franchised model is a more
consistent profit steam, with limited working capital requirements, minimal capital spending,
and much higher ROIC. This allows the franchisor to take on more financial risk and increase
debt.
April 4, 2017
17
Page 18
Evercore ISI
Ownership vs Franchise Economics
0%
20%
40%
60%
80%
100%
QS
R F
ran
ch
ise
d
Resta
ura
nts
-Q
SR
*
Resta
ura
nts
-C
DR
*
Sp
ec
ialt
y S
tore
s
Do
lla
r S
tore
s
Dep
art
men
t S
tore
s
Au
to P
art
s
Ho
me F
urn
ish
ing
Bra
nd
ed
Ap
pare
l
Ph
arm
ac
y
Bo
ok
Sto
res
Gro
ce
rs
Off
ice P
rod
ucts
Dis
co
un
ters
Co
ns
. E
lectr
on
.
Ho
me Im
pro
ve
men
t
Clu
bs
EV/EBITDA and % of U.S. Store Franchised The highly franchised QSR names trade at a 50% premium to the
casual diners that tend to have a lower franchised store base
Restaurant & Retail Variable Margin
The highly franchised QSR names trade at a 50% premium to the CDR
names that tend to be company owned. The primary reason for the multiple
differential is the highly franchised QSR names are ‘de-risked’ businesses, where
labor and commodity volatility are passed on to the franchisee. Other factors at
play such as better margins, positive traffic, and a greater international growth
opportunity also contribute to the higher multiple. The CDR names tend to do less
well in a franchised model due to menu / cooking complexity, and the need for
more oversight as customer experience or interaction with the employees is a
larger component of success for the business.
Restaurants have the highest variable margin (contribution margin) of any
retail format. As most costs in a restaurant tend to be fixed, with the exception of
food, the flow through to profit on an incremental sale is very high. Company
owned QSR restaurants have a contribution margin close to 60%, which is 26%
food, where we’d estimate that 75% of the variable costs are fixed. As CDRs
generally have higher food costs and more labor, as a group, it’s contribution rate
is closer to 55%. The Franchised QSR model is almost pure profit to the
franchisor, with exceptionally higher flow through to profit with any change in
sales. We estimate the contribution margin for QSR franchised names to be ~80-
90%.
MCD
SBUX YUM
CMG
DRI
QSR
DPZ
PNRA
DNKN
CBRLBWLD
EAT
WEN
TXRHJACKCAKE
BLMN
PZZA
DIN
PLAY
SONC
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
22.0x
0% 20% 40% 60% 80% 100%
2017
EV
/EB
ITD
A
% of U.S. Stores Franchised
Owned CDR
Highly Franchised
QSR
Source: FactSet, Technomic, Evercore ISI.
April 4, 2017
18
Page 19
Evercore ISI
The Three Things That Matter Most to The Restaurant Industry
Source: BEA, BLS, Evercore ISI
Sales Labor Costs Food Costs
2.5%
3.2%
4.0%
5.4%
5.9%
4.8%
4.1%
2.3%
1.5%
0.3%
0.0%-0.1%
0.1%
1.3%
1.8%2.1%
3.5%
1.1%1.1%
2.0%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
e
2Q
17e
3Q
17e
4Q
17e
20
15
20
16
20
17
e
20
18
e
Comp 2-Yr Stacked Avg.
Outlook: Easy comps, but not expected to
get better until 2H. 2014-2015 were exceptional years for SSS growth,
as commodity pricing in 2014 enabled some price
increases in early 2015 that was additionally aided
by good trends in the economy (notably
employment), that helped demand. While the SSS
trend decelerated over the course of 2015, the
overall comp growth rate was 3.5%. In 2016,
comps slowed to 1.1% largely on these compares
from ’14 & ‘15. In the context of persistent labor
inflation, most of the current growth will be pricing
needed to offset higher labor costs in many
markets. In 2017, comps are expected to remain
flat at ~1%, with performance weighted to back
half with 2% comps at limited service and flat
comps at CDRs.
Outlook: Not Good, But Manageable Labor inflation is occurring as there is less slack in
labor as employment trends have improved. While
there hasn’t been an increase in the federal minimum
wage, 24 states mandated minimum wage increases in
2015, and 16 did so in 2016 in addition to many cities
mandating even larger increases. Given most QSRs
are highly franchised, this is less of an impact among
that group, but will be a larger impact among highly-
owned chains. Average CDR chain has labor as a %
of sales at ~32%, while QSR labor margins average
27%. On a state weighted basis, wages increased
3.6% increase in 2016, and then accelerated to 3.8% in
2017. We expect this to be about a ~50bps headwind
to margin in ’16. And the lowering of the salary
threshold for overtime (impacting managers) will further
increase labor costs.
Outlook: Moving to Neutral Processed food moving to neutral, but
restaurants are still raising price. There is
currently a large disconnect between pricing /
category inflation, and what was occurring with
processed food deflation. Depending on the
commodity basket, most restaurants are calling
for food inflation to be flat to slightly up in 2017.
Restaurants are also planning on 2-3% pricing to
offset higher labor costs. With food representing
~25-30% of sales, this would be roughly 50-
100bps benefit in 2017 after a 200bps benefit in
2016.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Feb
-11
May-1
1
Au
g-1
1
No
v-1
1
Feb
-12
May-1
2
Au
g-1
2
No
v-1
2
Feb
-13
May-1
3
Au
g-1
3
No
v-1
3
Feb
-14
May
-14
Au
g-1
4
No
v-1
4
Feb
-15
May-1
5
Au
g-1
5
No
v-1
5
Feb
-16
May-1
6
Au
g-1
6
No
v-1
6
Feb
-17
CPI Food Away From Home PPI Processed Food
Restaurant SSS Trend Restaurant CPI & Processed Food
PPI
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
2013 2014 2015 2016 2017 2018
Population Weighted State Minimum Wage
YoY Change
State Minimum Wage Increases
April 4, 2017
19
Page 20
Evercore ISI
QSR Menu Strategies
Limited-Time-Offers
10% of Sales
Core Menu
70-80% of Sales
Value
10-20% of Sales
Often premium or seasonal items designed to
create urgency with customers
Successful limited time offers can drive both ticket
and traffic
Items may start as LTOs, but if successful can
transition to the normal menu – examples include
the Dorito-locos taco (maybe the most successful
recent LTO) and the Buttery Jack Burger
Can be inconsistent and therefore
unnecessarily add complexity and waste
marketing dollars
These items are the most well-known, often
highest sellers i.e. Big Mac, Whopper, Egg
McMuffin, single and double stacks, etc…
Core menu items are largely sold and consumed
in bundled offers
The core menu is seldom discounted as QSRs
are weary to anchor customers into a lower price
for these products
From the core menu, breakfast is the fastest
growing daypart for those offering breakfast
Bundled or disruptive value seems to be the most
popular, as QSRs are offering full bundled meals for
less than $4 (Wendy’s 4 for $4, Hardee’s $4 Real
Deal, BK 5 for $4)
These deals drive transactions and attract different
customers reducing cannibalization
Some cannibalization likely exists reducing ticket
and also may anchor customers into a price such
as the Subway $5 Footlong
As commodities have declined, QSRs are
increasingly competing in value
Source: Company Data, Evercore ISI
April 4, 2017
20
Page 21
Evercore ISI
Mobile Commerce and Industry Adoption
Technology employment is increasingly becoming a differentiator and driver of sales for restaurants.
At this point, nearly all of the QSRs have an app, but the
restaurants that were the earliest adopters, and those that
have fully integrated technology into their business in terms
of payment and ordering have benefitted the most. The
original apps evolved from being purely informational (store
locations, menu information), to a medium for more effective direct
marketing, to becoming a payment medium and /or part of a loyalty
program, to an ordering and payment platform.
For the restaurant: The employment of technology can reduce
labor expense or, at a minimum, enable more efficient labor by
shifting labor from order taking to order processing (MCD in
Europe). It can increase order accuracy in menus with order
complexity (PNRA), and orders made via an app or kiosk
frequently include increased attachments and higher ticket. For
example, customers are more inclined to add a desert when the
order is not given to a teller. When funds are pre-loaded onto an
account, the pre-load saves on interchange in low-ticket
purchases, and can potentially help the restaurant to achieve a
negative working capital balance.
For the customer: It provides a convenience factor by allowing
the customer the ability to input the order at the location / time of
their choosing, but it also enables the customer to save time by
avoiding the line (SBUX, PNRA). When integrated with a rewards
program, technology can drive loyalty and also creates a material
differentiator or barrier versus local competition who are unable to
employ such technology (DNKN).
While it is impossible to quantitatively suggest what level of spend
or what features will drive a certain level of sales, the early
adopters are clearly winning. We view SBUX technology as best
in class versus DNKN, who apologized for the quality of its app last
year. We believe technology is a contributing factor to Starbucks’
HSD comps versus Dunkin’s LSD comps. Domino’s is also best-
in-class with features like text to order, while Pizza Hut offers
limited features – again, the comp differential is profound between
the two chains.
Mobile
Order and
Payment
Best in class. More than 60% of orders are
ordered online – also can order via social
media.
Early adopter. 25% of transactions are
mobile and 8% are mobile order and pay.
Offers mobile order and pay and easy
pickup. 24% of transactions are digital.
Later adopter vs. competitors. Less than
50% of orders are made online.
Allows for mobile order and pay but masked
by food safety issues.
Allows for mobile order and pay.
App allows for payment. To go ordering
rolled out in June 2016.
Mobile ordering is only available in select
locations – currently being rolled out to the
entire system.
App only provides offers, menu information
and locations.
App only provides offers, menu information
and locations. Uses Apple Pay.
App only provides offers, menu information
and locations.
Mobile
Payment,
Rolling Out
Mobile
Order
Used for
marketing,
offers and
restaurant
location
Source: Company Data, Evercore ISI
April 4, 2017
21
Page 22
Evercore ISI
Restaurant Coverage Exposure to Minimum Wage Increases
2017 Average Weighted Minimum Wage Increase
Based on U.S. Total Stores
2.6%
3.0%
3.1%
3.5%
3.9%
4.2%
4.3%
4.7%
4.8%
5.0%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
WEN
DPZ
MCD
PNRA
Avg
CMG
YUM
DNKN
SBUX
JACK
3.0%
3.2%
4.2%
4.2%
4.7%
4.8%
5.6%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
PNRA
WEN
DPZ
AVG
JACK
CMG
SBUX
On average, the domestic systems of our coverage universe are expected to experience an average
increase of 3.9% for minimum wage employees vs. 3.8% for the U.S.
However, in the restaurant space, this distinction between company owned and franchised is very
important, because for franchised locations, the corporate will not directly be impacted by wage
increases. The only companies in our coverage universe with significant direct exposure to increasing
minimum wages are CMG, PNRA, and to a lesser extent JACK, as its smaller concept, Qdoba, is ~50%
owned.
Source: Department of Labor, Census Bureau, Tetrad, Thinknum, Evercore ISI 22
April 4, 2017
2017 Average Weighted Minimum Wage Increase For
U.S. Company-Owned Stores
Page 23
Evercore ISI
Restaurant Exposure to Labor Inflation By Concept
Source: Company Data, Consensus Metrix, Evercore ISI
Fast Casual and Casual Dining Restaurants are primarily in the U.S. and company-owned, so they are
very exposed to wage inflation. QSRs are largely franchised and more geographically diversified, which
reduces exposure to minimum wage increases.
23
April 4, 2017
% Domestic
Quick Service % Domestic and Owned
Bojangles 100% 46%
Jack in the Box 100% 26%
Papa Johns 69% 15%
Sonic Corp 100% 10%
Papa Murphy's 100% 8%
Wendy's 93% 5%
YUM Brands 43% 4%
McDonalds 39% 3%
Domino's Pizza 39% 3%
Popeyes Louisiana Kitchen 76% 2%
Wingstop 100% 2%
Dunkin Brands Group 56% 0%
Restaurant Brands International 39% 0%
QSR Mean 73% 9%
QSR Median 76% 4%
% Domestic
Fast Casual % Domestic and Owned
Chipotle Mexican Grill 99% 99%
Zoes Restaurants 100% 99%
Habit Restaurant 100% 95%
Potbelly's Corp 100% 91%
Fiesta Restaurants Group 100% 89%
Noodles and Company 100% 86%
Shake Shack 60% 54%
Panera Bread Co 99% 45%
El Pollo Loco 100% 44%
Starbucks 54% 37%
Fast Casual Mean 91% 74%
Fast Casual Median 100% 87%
% Domestic
Casual Dining % Domestic and Owned
BJ's Restaurants 100% 100%
Bob Evan's 100% 100%
Chuy's Holdings 100% 100%
Cracker Barrel 100% 100%
Dave and Buster's 100% 100%
Del Frisco's Grill 100% 100%
Kona Grill 100% 100%
Darden Restaurants 98% 97%
The Cheescake Factory 94% 94%
Ruby Tuesdays 100% 89%
Texas Roadhouse 98% 83%
Bloomin' Brands 85% 78%
Fogo de Chau 74% 74%
Brinker International 79% 63%
Buffalo Wild Wings 93% 51%
Ruth's Chris Steakhouse 86% 46%
Denny's 100% 10%
DIN 95% 0%
Casual Dining Mean 95% 77%
Casual Dining Median 99% 91%
Page 24
Evercore ISI
Commodity Pricing
April 4, 2017
24 Source: FactSet, USDA, Evercore ISI,
0.1%
-1.4%
5.5%
11.8%
-8.3%
3.3%
1Q17e 2Q17e 3Q17e 4Q17e 2016 2017e
-16%
-7% -7%
-1%
3%
-5%
-14%
-8%
4%
14%
6%
-5%
4%2%
-2%
3%
Beef Chicken Pork Cheese Coffee Corn Wheat WeightedAverage
2016 2017e
If current commodity prices were to hold, commodities are expected to be slightly up this year.
Projected YoY Weighted Average Commodity
Basket Change using Current Prices Commodity deflation is expected to be a slight benefit in 1H17, but this is
expected to reverse in 2H17.
Projected YoY Commodity Changes Assuming current prices, cheese and wheat are expected to experience
the most deflation in 2017, while corn is expected to be flat and the
remaining commodities are expected to be inflationary.
Beef Chicken Pork Cheese Coffee Corn Wheat Weighted Average
Price Change vs. Today
1 Week -2.2% -0.1% -2.8% 5.8% 1.2% 2.2% 0.4% 0.7%
1 Month 4.0% 13.7% -6.3% 2.3% -1.4% -2.8% -1.7% 2.6%
3 Month 8.6% 15.3% 18.8% -8.1% 1.6% 3.5% 4.5% 6.4%
6 Month 20.8% 36.7% 22.1% -2.6% -8.1% 8.2% 6.1% 14.6%
YoY -19.0% -2.2% 14.6% -7.8% -1.1% -5.8% -20.5% -8.8%
YoY Price Changes
Today -19.0% -2.2% 14.6% -7.8% -1.1% -5.8% -20.5% -8.8%
1M Ago -7.6% 8.1% 9.5% -1.5% 18.9% 5.7% -4.6% 1.6%
3M ago -8.8% -1.5% 8.7% 4.6% 8.2% -1.9% -13.2% -2.9%
6M Ago -11.8% -2.4% -23.7% -6.6% 21.9% -13.5% -21.7% -10.3%
12M Ago -16.4% -14.4% 10.5% -8.8% -9.7% -8.4% -11.3% -10.4%
Page 25
Evercore ISI
FX
April 4, 2017
25 Source: Federal Reserve, Company Data, Evercore ISI
-3%
4%
-13%
-5%
1%
5%
1%
-16%
-14%
-7%
-2%
-13%
-17% -16%
-1%
-3%
-11%
-5%
12%
-1% -1%
-4%
1%
-8%
-3%-5%
2%
-2%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Euro Canadian Dollar Pound Yuan Yen AUD Trade WeightedIndex
1Q17e 2015 2016 2017e
YoY Change in FX Rates (Positive change equates to a weaker dollar).
The dollar has strengthened since the election, and assuming current rates, FX should be a low single digit
headwind in 2017. Coverage Universe International Exposure MCD, YUM, SBUX and DPZ have the most international exposure.
While it was hoped that 2017 would finally be the year that FX
would not be an issue (or potentially even a tailwind), the dollar
strengthened to 15-year highs after the election. While it has since
given up some of those gains, FX remains volatile with many various
factors (presidential tweets for example) resulting in significant
fluctuations.
At current prices of the Trade Weighted Dollar Index, FX will be a
2% headwind in 2017 vs. a 1% headwind in 2016 and a 16%
headwind in 2015. Currencies that are expected to weaken the most
against the dollar in 2017 include the Euro, Pound, Yuan and Yen.
Excluding YUMC, YUM has the most exposure to FX by operating
income in our coverage, and likely an even larger exposure at an EPS
level due to their mostly domestically levered balance sheet.
% of Stores % of Op Profit % of Stores with Currency in
Int'l Int'l Euro Yuan CAD Yen
YUMC 100% 100% 0% 100% 0% 0%
YUM 57% 53% 3% 16% 3% 4%
MCD 61% 50% 13% 6% 4% 8%
SBUX 46% 29% 3% 8% 6% 5%
DPZ 56% 28% ~5% 3% 3% < 1%
DNKN 44% 8% ~2% 2-3% < 1% 2-3%
WEN 7% < 5% 0% 0% 6% < 1%
CMG 1% < 1% < 1% 0% < 1% 0%
PNRA < 1% < 1% 0% 0% < 1% 0%
JACK 0% 0% 0% 0% 0% 0%
Page 26
Evercore ISI
Summary of Restaurant P&L Impact of Proposed Tax Changes
April 4, 2017
26 Source: Evercore ISI
Owned
Restaurant
Model
Franchised
Restaurant
Model
P&L
Today
P&L
With
Reforms
P&L
Today
P&L
With
Reforms Impact
Magnitude of
Impact Comments
Same Store Sales ???
Complete unknown. Sales seem to have improved modestly post-election, but the
sustainability of the trend is unknown. Over the longer-term, infrastructure spending,
drilling, and mining might help demand.
Unit Growth ???
Complete unknown. Franchisees might be more inclined to throw capital at growth if they
had better visibility on labor costs. A more franchise friendly DOL and NLRB likely make
franchisees feel better about investing in their business
Total Sales 100 100 10 10 ??? TBD If economic activity accelerates, would be higher.
Food & Paper 30 30Negative,
HigherSmall
Possible negative for some imported foods if a border tax system is implemented. Largest
drags likely among companies that use coffee and avocados.
Labor 28 28
Positive,
Less
Regulation
Short-term,
none. Long-
term, large
Less likelihood of federal minimum wage increase, and unfavorable regulation like Browning-
Ferris and Salaried Exempt Rules.
Occupany & Other 23 24Higher, but
good
Depends on
growth rate
If capital expenditures are immediately expensed, this would push down operating profit. If
discounted using time value, this would create value for the company, but ultimately, more
about timing of deductibility.
Restaurant Profit 19 18Flat or
downSmaller Food might be a modest headwind, while expensing capex hurts profit, but creates tax shield
G&A 9 9 5 5.2Higher, but
goodDepends
If capital investments are allowed to fully be expensed, this would either flow through G&A or
Occupancy & Other (if the restaurant is owned).
Interest* 1 1 1.67 1.67 Negative LargeUnder several of the plans being discussed, interest expense on future loans would not be
deductible.
Pre-Tax Profit 9.0 8.0 3.3 3.1 Lower Smaller Reported PTOP likely be lower if import costs increased, and if capex is expensed
Tax Rate** 30% 15% 38% 23%Positive,
Lower
Highly franchised restaurants tend to carry a lot of debt, and elimination of the deductibility of
interest would have a very negative impact. Under Republican plan the corporate rate
would drop to 20% and future repatriated income from outside the US would not be taxed.
Tax 2.7 1.4 1.3 1.1 Positive Large
Lower tax rate materially helps casual dining restaurants because they have less interest
expense. Lower tax rate on the franchised side almost completely offset by losing
deductibility of interest.
Net Income 6.3 6.7 2.1 2.0 Mixed
% Change 5.6% -1.9% Mixed
* We assume a 3x interest coverage ratio, which is at the lower end.
** Owned restaurants with tipped labor pay federal tax about 20% lower than the federal corporate tax rate due to the FICA tip credit. We assume that stays.
** Assume the statutory corporate tax rate drops from 35% to 20% (Trump calls for 15%).
Page 27
Evercore ISI
Individual Tax Cut Impact
April 4, 2017
27 Source: Census Bureau, BLS, Evercore ISI
Nominal & Real Restaurant Growth
Individual tax cuts have historically accelerated restaurant sales.
Real Restaurant Sales Growth Rates.
-5%
0%
5%
10%
15%
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
Nominal Restaurant Sales Growth
Real Restaurant Sales Growth
1986Tax Cut
Bush TaxCuts
1981Tax Cut
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
3.2%
3.4%
3.6%
3.8%
Avg. Growth Rate'67-'16
Reagan Era Cuts '82-'88
Bush Era '02-'06
Topline Impact Conclusion: Nearly impossible to quantify and the timing will be hard to predict. Fewer regulations, individual tax cuts, and
infrastructure spending is generally stimulative, but the timing and magnitude of benefit are hard to predict.
For comp growth: During the Reagan Era tax cuts real restaurant growth rates were 1pt higher, and during the Bush Era tax cuts real growth rates
were 50bps higher than the average growth over the last 50 years.
For unit growth: Franchisees who had become rather apoplectic over the state of the industry in light of wage increases and regulation that
seemed likely to increase under a Democratic legislative and executive branch, now might be more inclined to invest in unit growth if regulatory
visibility improves.
Economic Recovery Tax Act of 1981 (“ERTA”): The ERTA was signed into law in August 1981, and real restaurant sales growth accelerated by
80bps in 1982 and 490bps in 1983 before decelerating by a combined (300)bps over the next two years, which may have been part ially due to
subsequent tax increases signed into law in 1982 and 1984.
The “Bush Tax Cuts”: The EGTRRA was signed in 2001, but phased in reductions for all tax brackets and provided for lower capital gains through
2006. This had little immediate impact on economic growth and restaurant sales growth held steady in 2002. The JGRRTA, signed in 2003,
accelerated the cuts and in the same year, nominal restaurant sales growth accelerated 140bps to 5.8% and then to 6.5% in 2004, and generated
similar growth until the economic crisis began in 2007.
Page 28
Evercore ISI
Changes in the Corporate Tax Code
April 4, 2017
28
2018 EPS Accretion with 20% Corporate Tax Rate and Elimination of Interest Deduction Domestic concepts, like CMG, would benefit the most from a tax decline. We estimate that the average 2018 EPS accretion among our coverage
universe would be 14%. However, the elimination of interest deduction bringing down the average accretion to 9%.
Reduction in corporate tax rates: The big offset to the loss of interest deductibility would be the reduction in the corporate statutory rate from 35% to 20%
under the House plan proposed by the Republicans, and 15% proposed by Trump. Given casual dining restaurants tend to be more company owned, carry
less debt, and tend to be more domestic, they would be the largest beneficiaries. This would also be a material benefit the franchised restaurants with
international income if the plan holds to not tax income earned, but repatriated back to the US.
Elimination of the interest tax deduction. This would be a material drag on profit for the highly franchised restaurants with high leverage ratios. Some
proposals suggested this would only be on future debt issuance, but would raise the cost of using debt funding and would negatively impair valuations. To the
extent a private equity bid has existed on buying both franchise restaurants or buying chains, if interest tax deduction were eliminated, it would lower the return
assumptions and lower the amount of debt that would likely be issued in an LBO.
Food costs on imported goods could increase under a territorial tax scheme. A territorial tax or destination based consumption tax would have the effect
of taxing goods where they are consumed rather than produced. This would have the effect of taxing imports rather than exports. While the dollar value of
U.S. food imports is $110B representing a fraction of overall food spend, the products most directly impacted would be those where very little is produced in
the U.S. such as with coffee and avocados
Among our coverage, we estimate the move to a 20% federal corporate tax rate would be a 15% benefit to earnings on average, but it interest
deductibility was eliminated it would actually reduce EPS for WEN and YUM.
The tax implications from changes in the tax code could be quite profound for restaurants and would
impact several areas of the P&L.
22.0%
16.6% 13.6%18.9%
18.1% 18.3% 10.5%
2.8%
14.1%
6.6%
22.0%
15.1%13.0% 12.7%
9.8% 9.5%7.9%
2.8%
-1.0%-2.8%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
CMG PNRA SBUX JACK DNKN DPZ MCD YUMC WEN YUM
EPS Accretion - 20% Corp Tax Dilution from Interest Deduction Elimination EPS Accretion with No Int Deduction and 20% Corp Tax
Source: Company Data, Evercore ISI
Page 29
Evercore ISI
Restaurant Industry Valuation & Price Performance
Source: FactSet, Evercore ISI
Restaurant NTM Price to Earnings QSR and CDR Relative Price Performance
Valuations in QSR/Limited Service multiples are back near all-time highs, but are
trading at historical average multiples relative to the S&P. Casual dining multiples
recovered as well but have since faded due to lackluster performance and are below
relative historical averages. Initial optimism around owned domestic restaurant stocks
has since faded due to a downturn in traffic, which coupled with labor inflation. will
likely cap margin expansion over the near-term. On an EV/EBITDA basis, limited
service restaurants trade at a 29% premium to historical averages, and are near peak
multiples. Relative to the S&P, limited service EBITDA multiples are trading equal to
historical averages. While this looks expensive, there are multiple factors why QSR
restaurants should trade at a premium: The industry shift towards a more highly franchised model means less operating and cash
flow volatility
Declining capex means more FCF going to dividends and buybacks.
Fast casual segment is experiencing outsized growth with limited risk of disintermediation
Margins and returns are the highest in the consumer universe
Restaurant stocks have outperformed the S&P over the past ten years, but this
outperformance was primarily during 2006-2011. Limited service concepts have
outperformed the S&P by ~80 points while CDRs have outperformed by 10pts over the
past ten years. Since the election, restaurant stocks are on average up 12%, vs. 10%
for the S&P with QSRs being up 9%, Fast Casuals being up 10% and CDRs being up
15%.
Restaurant NTM EV/EBITDA
247.5
163.9173.2
0
40
80
120
160
200
240
280
Limited Service Casual Dining S&P 500
April 4, 2017
29
Limited Service
CDR
S&P
13.8x
9.4x
10.8x
3x
6x
9x
12x
15x
Limited Service Casual Dining S&P 500
23.6x
19.1x
17.5x
5.0x
10.0x
15.0x
20.0x
25.0x
Limited Service Casual Dining S&P
Page 30
Evercore ISI
93.1%28.9%
20.5%18.7%
17.8% 17.2%15.7%
12.5%11.5% 11.3%
CMG WEN DPZ JACK SBUX YUM PNRA YUMC MCD DNKN
Coverage Universe Valuation & Projected Returns
*Total Shareholder Return defined as EPS CAGR plus current Dividend Yield
Source: FactSet, Evercore ISI
We project mid-teens total shareholder returns for our coverage
universe driven by mid-single digit top-line growth, operating
leverage, financial leverage and buybacks. We define Total
Shareholder Return (“TSR”) as projected 2016-2020 EPS CAGR plus the
current dividend yield. The median TSR for our coverage universe is
17.3% while the average TSR, excluding Chipotle, which is projected to
generate EPS growth of more than 90% (due to EPS decline from
foodborne illness issues), the average is 17.1%.
We believe that our coverage universe on average, will generate low-
single digit unit growth and low-single digit comp growth resulting in mid-
single digit topline growth. For highly franchised QSRs, this topline
growth largely drops to the bottom line. For highly-owned QSRs, we
believe that this topline growth coupled with levering of non-labor related
fixed costs (occupancy, G&A, etc…) will be sufficient to offset wage
inflation resulting in margin expansion. Overall, we project high-single
digit EBIT growth for our coverage universe. This combined with financial
leverage and low-to-mid single digit projected annual share count
reductions result in low-double digit EPS growth. Seven of the nine
companies in our coverage universe issue dividends (1-3% yields)
resulting in a median mid-double digit TSR.
While restaurants overall have the highest valuation of any consumer
sector, these companies also have the highest combined earnings and
dividend growth, justifying this valuation.
2016-2020 Total Shareholder Return*
April 4, 2017
30
Restaurant Valuation and Growth Rate Compared to
Other Consumer Sectors.
Restaurants
Auto Parts
Auto Dealers
Home Improvement
Home Furnishing
Discounters
Luxury
Athletic
Dept Stores
Off Price
Specialty Apparel
Beverages
FoodHH & PC
10x
12x
14x
16x
18x
20x
22x
24x
26x
28x
6% 8% 10% 12% 14% 16%
Pri
ce
to
Earn
ing
s F
Y2
Earnings and Dividend CAGR to 2018
Page 31
Evercore ISI
Restaurants Valuation Summary
Source: FactSet, Evercore ISI
All companies are Not Rated except for SBUX, WEN, JACK, DPZ, YUM, YUMC, CMG, MCD, PNRA, DNKN. All estimates for Not Rated companies are
consensus.
April 4, 2017
31
April 4, 2017
52 Week Market Stock Movement EV/EBITDA PE FCF Yield 2016-2018 Growth CAGR Total Debt/ SI % of Float
Name Ticker Price High Low Rating Cap EV YTD 52 Week Election 2017e 2018e 2017e 2018e 2017e Div Yield Units EBITDA EPS EBITDA Current
Quick Service
Bojangles BOJA 20.10$ 21.85$ 14.55$ NA $733 $909 7.8% 15.4% 20.4% 11.0x 10.2x 20.3x 17.3x 5.1% 0.0% 8.4% -0.1% 13.5% 2.1x 8.3%
Carrol's TAST 13.90$ 17.55$ 9.60$ NA $503 $721 -8.9% -4.5% 23.6% 7.7x 7.3x 14.0x 12.0x 7.4% 0.0% 5.7% 5.2% 13.5% 2.5x 4.0%
Domino's Pizza DPZ 186.23$ 192.01$ 116.91$ In-Line $8,946 $10,964 16.9% 39.5% 10.7% 19.7x 17.4x 35.9x 29.4x 2.8% 1.0% 7.5% 13.0% 21.4% 4.4x 7.1%
Dunkin Brands Group DNKN 54.58$ 58.43$ 41.29$ Underperform $5,025 $7,091 4.1% 13.8% 13.3% 15.0x 14.1x 22.9x 20.6x 5.4% 2.4% 2.9% 5.9% 9.9% 5.4x 7.9%
Jack in the Box JACK 101.89$ 113.30$ 62.85$ In-Line $3,224 $4,259 -8.7% 58.7% 5.9% 11.8x 11.0x 23.0x 18.9x 5.1% 1.6% 3.4% 8.2% 19.4% 3.1x 6.1%
McDonalds MCD 129.61$ 131.96$ 110.33$ In-Line $106,150 $130,882 6.5% 2.0% 13.2% 13.8x 13.6x 21.3x 19.8x 4.3% 2.9% 2.0% 1.2% 8.7% 2.8x 0.9%
Papa Johns PZZA 80.16$ 90.49$ 53.78$ NA $2,953 $3,243 -6.3% 44.4% 0.0% 15.5x 14.5x 28.4x 25.6x 3.8% 1.0% 4.3% 5.1% 10.8% 1.5x 13.0%
Papa Murphy's FRSH 5.03$ 12.96$ 3.56$ NA $85 $194 19.2% -56.4% 28.6% 8.3x 7.5x NA NA 5.5% 0.0% 1.9% 1.8% NA 4.4x 23.8%
Restaurant Brands International QSR 55.81$ 57.98$ 37.54$ NA $26,236 $36,795 17.1% 42.3% 20.6% 17.8x 16.3x 30.7x 23.3x 5.1% 1.4% 5.9% 9.8% 23.1% 6.4x 2.2%
Sonic Corp SONC 25.13$ 36.34$ 21.12$ NA $1,104 $1,664 -5.2% -28.9% 5.6% 11.2x 10.8x 20.1x 17.9x 4.7% 2.2% 1.3% -4.8% 4.3% 3.6x 15.7%
Wendy's WEN 13.56$ 14.47$ 9.15$ Outperform $3,348 $5,662 0.3% 23.4% 21.1% 14.1x 12.8x 29.3x 21.2x 5.2% 2.1% 2.0% 7.6% 31.8% 6.6x 6.1%
Wingstop WING 28.00$ 33.42$ 22.92$ NA $808 $953 -5.4% 15.3% 3.4% 24.0x 20.4x 43.8x 35.6x 2.7% 0.0% 12.1% 14.7% 16.5% 4.2x 26.5%
YUM Brands YUM 63.55$ 91.99$ 59.57$ Outperform $22,487 $30,187 0.3% 7.4% 2.4% 15.5x 15.0x 23.9x 20.5x 4.4% 1.9% 3.4% 1.6% 12.5% 4.7x 2.2%
YUM China YUMC 27.20$ 30.37$ 23.79$ In-Line $10,453 $10,003 4.1% NA 2.3% 8.4x 7.9x 18.8x 16.7x 5.2% 0.0% 6.1% 7.0% 10.7% 0.0x 2.1%
Mean 2.9% 13.3% 13.0% 14.3x 13.1x 26.1x 21.8x 4.7% 1.3% 4.7% 5.3% 15.5% 4.0x 9.5%
Median 0.3% 15.3% 13.2% 14.1x 13.6x 23.5x 20.5x 5.1% 1.4% 3.4% 5.2% 13.5% 4.2x 7.1%
Fast Casual
Chipotle Mexican Grill CMG 452.75$ 473.17$ 352.96$ In-Line $12,986 $12,569 20.0% -2.6% 21.0% 23.4x 19.3x 56.6x 42.4x 2.3% 0.0% 9.0% 78.4% 202.3% 0.0x 16.5%
Fiesta Restaurants Group FRGI 23.60$ 36.02$ 19.40$ NA $635 $704 -20.9% -29.5% -7.7% 7.7x 7.2x 21.3x 19.3x 1.7% 0.0% 10.8% 2.7% -2.8% 0.8x 7.9%
Habit Restaurant HABT 17.50$ 20.01$ 13.20$ NA $494 $456 1.4% -5.1% 20.2% 14.0x 11.5x 60.9x 54.5x NA 0.0% 25.6% 10.9% 1.8% 0.2x 11.3%
El Pollo Loco LOCO 11.60$ 14.98$ 10.08$ NA $446 $548 -5.7% -15.5% 8.9% 8.4x 7.7x 10.5x 9.5x 3.0% 0.0% 6.0% 4.1% -2.8% 1.6x 13.7%
Noodles and Company NDLS 5.95$ 11.86$ 3.16$ NA $157 $240 45.1% -49.2% 52.6% 7.7x 6.9x 20.7x 18.5x 5.3% 0.0% -0.4% 16.1% 1.8% 3.3x 15.7%
Panera Bread Co PNRA 282.63$ 292.42$ 185.69$ In-Line $6,032 $6,354 37.8% 32.7% 47.1% 14.3x 12.9x 37.0x 31.4x 1.9% 0.0% 3.6% 9.3% 15.5% 1.0x 15.7%
Potbelly's Corp PBPB 13.90$ 14.99$ 11.58$ NA $349 $325 7.8% 1.4% 12.5% 7.4x 6.7x 29.7x 25.9x 0.8% 0.0% 8.7% 8.1% 9.2% 0.0x 5.9%
Shake Shack SHAK 33.44$ 42.94$ 30.36$ NA $1,266 $1,192 -6.6% -9.3% 2.4% 21.7x 17.3x 66.4x 53.4x 0.0% 0.0% 28.1% 27.8% 16.7% 0.0x 53.0%
Starbucks SBUX 58.44$ 61.64$ 50.84$ Outperform $85,170 $86,182 5.3% -4.2% 6.7% 15.2x 13.3x 27.5x 23.4x 3.3% 1.7% 8.5% 11.8% 14.6% 0.6x 1.0%
Zoes Restaurants ZOES 17.64$ 41.76$ 16.39$ NA $343 $368 -26.5% -55.6% -18.9% 15.0x 12.2x 431.2x 150.4x NA 0.0% 16.7% 14.0% 21.1% 1.3x 32.3%
Mean 5.8% -13.7% 14.5% 13.5x 11.5x 76.2x 42.9x 2.3% 0.2% 11.7% 18.3% 27.7% 0.9x 17.3%
Median 3.4% -7.2% 10.7% 14.2x 11.8x 33.3x 28.7x 2.1% 0.0% 8.9% 11.3% 11.9% 0.7x 14.7%
Casual Dining
BJ's Restaurants BJRI 40.10$ 47.55$ 32.24$ NA $877 $1,002 2.0% -4.9% 11.5% 8.2x 7.5x 22.6x 19.7x 4.0% 0.0% 5.4% 2.4% 4.1% 1.2x 9.0%
Bloomin Brands BLMN 19.75$ 20.04$ 15.82$ NA $2,035 $2,994 9.5% 14.7% 13.3% 7.0x 7.0x 14.1x 13.2x 6.7% 1.6% -0.5% 0.0% 7.6% 2.5x 9.1%
Brinker International EAT 43.79$ 55.84$ 40.92$ NA $2,140 $3,526 -11.6% -5.5% -11.6% 8.2x 8.1x 14.1x 13.0x 9.3% 3.1% -5.3% -5.7% -2.7% 2.9x 16.8%
Buffalo Wild Wings BWLD 152.15$ 175.10$ 122.25$ NA $2,455 $2,548 -1.5% 1.8% 1.6% 8.3x 7.9x 26.2x 22.5x 6.4% 0.0% 0.7% 5.4% 14.9% 0.7x 10.6%
The Cheescake Factory CAKE 63.18$ 64.41$ 46.93$ NA $3,015 $3,062 5.5% 18.1% 18.5% 10.7x 10.1x 20.8x 19.0x 4.3% 1.5% 5.2% 2.5% 8.5% 0.3x 18.3%
Chuy's Holdings CHUY 29.55$ 37.78$ 25.87$ NA $498 $484 -8.9% -5.0% 4.8% 10.4x 9.4x 26.2x 23.6x 1.0% 0.0% 16.0% 11.2% 7.7% 0.0x 12.2%
Cracker Barrel CBRL 159.14$ 175.04$ 130.15$ NA $3,826 $4,041 -4.7% 4.5% 17.1% 10.3x 9.7x 19.3x 17.9x 5.2% 2.9% 1.8% 7.6% 8.6% 1.1x 18.7%
Darden Restaurants DRI 83.21$ 84.13$ 59.50$ NA $10,332 $10,381 14.4% 24.1% 26.1% 9.7x 9.2x 19.0x 17.6x 5.3% 2.7% 2.1% 7.4% 9.0% 0.5x 9.1%
Dave and Buster's PLAY 60.63$ 63.12$ 36.83$ NA $2,551 $2,795 7.7% 55.1% 46.7% 10.1x 9.1x 24.9x 22.1x 2.8% 0.0% 12.5% 13.1% 14.2% 1.1x 13.1%
Del Frisco's Grill DFRG 18.20$ 18.50$ 13.01$ NA $426 $411 7.1% 11.0% 26.6% 8.6x 7.8x 21.7x 19.5x 2.7% 0.0% 4.4% 6.3% 6.1% 0.0x 1.5%
Denny's DENN 12.29$ 14.25$ 9.84$ NA $869 $1,112 -4.2% 18.5% 11.1% 10.8x 10.3x 21.3x 18.8x 6.7% 0.0% 1.2% 4.1% 9.0% 2.5x 2.5%
Dine Equity DIN 53.82$ 94.30$ 49.53$ NA $960 $2,200 -30.1% -42.4% -30.6% 9.2x 9.1x 10.8x 9.8x 9.6% 7.2% 1.5% -4.4% -4.4% 5.3x 8.3%
Fogo de Chau FOGO 16.40$ 17.89$ 10.50$ NA $463 $581 14.3% 1.1% 34.7% 9.6x 8.7x 17.9x 16.5x 3.7% 0.0% 13.9% 8.1% 6.9% 2.6x 4.5%
Kona Grill KONA 6.35$ 14.44$ 5.75$ NA $64 $87 -49.4% -51.0% -40.2% 5.8x 4.8x NA NA NA 0.0% 6.2% 24.1% -37.1% 2.3x 20.9%
Red Robin RRGB 56.95$ 67.05$ 40.85$ NA $733 $1,068 1.0% -9.8% 16.2% 7.2x 6.9x 20.6x 17.7x 7.0% 0.0% -2.7% 4.2% 7.6% 2.4x 27.1%
Ruth's Chris Steakhouse RUTH 20.00$ 20.30$ 13.74$ NA $638 $659 9.3% 8.3% 28.3% 9.9x 9.4x 18.8x 17.6x 4.2% 1.8% 4.1% 5.4% 8.1% 0.4x 2.0%
Texas Roadhouse TXRH 44.37$ 50.51$ 37.23$ NA $3,138 $3,083 -8.0% -0.2% 11.1% 10.8x 9.7x 23.8x 20.9x 2.7% 1.9% 3.2% 10.7% 12.0% 0.2x 9.4%
Casual Dining Mean -2.8% 2.3% 10.9% 9.1x 8.5x 20.1x 18.1x 5.1% 1.3% 4.1% 6.0% 4.7% 1.5x 11.4%
Casual Dining Median 1.0% 1.8% 13.3% 9.6x 9.1x 20.7x 18.3x 4.8% 0.0% 3.2% 5.4% 7.7% 1.1x 9.4%
Page 32
Evercore ISI
QSR AUV and Average Daily Transactions Comparison
Source: Technomic, 2015 Data, Evercore ISI.
QSR AUV Comparison The $2 million AUV level is typically the benchmark for the most
productive of QSRs.
QSR Average Daily Transaction Comparison At a $6 average ticket, $2 million AUV translates into ~850 average daily
transactions.
101
117
122
131
156
227
263
299
339
364
428
500
542
557
579
579
587
596
619
667
679
784
1,057
1,136
Pizza Hut
Baskin-Robbins
Papa John's
Domino's
Subway
Little Caesars
Jimmy John's
Dairy Queen
Arby's
Panda Express
KFC
Popeye's
Dunkin' Donuts
Burger King
Starbucks
SONIC Drive-In
Chipotle
Hardee's
Jack in the Box
Wendy's
Panera Bread
Taco Bell
McDonald's
Chick-fil-A
$234
$425
$704
$784
$837
$861
$885
$917
$923
$926
$1,037
$1,125
$1,213
$1,253
$1,267
$1,417
$1,483
$1,487
$1,510
$1,530
$2,424
$2,505
$2,511
$3,280
Baskin-Robbins
Subway
Pizza Hut
Dairy Queen
Little Caesars
Papa John's
Jimmy John's
Domino's
Dunkin' Donuts
KFC
Arby's
Starbucks
Hardee's
SONIC Drive-In
Burger King
Popeye's
Jack in the Box
Panda Express
Taco Bell
Wendy's
Chipotle
McDonald's
Panera Bread
Chick-fil-A
April 4, 2017
32
Page 33
Evercore ISI
$457.52 $590
$375
$225$200
$300
$400
$500
$600
$700
$800
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Chipotle (CMG), In-Line, Base Case $375
Investment Thesis
• Recovery is Slower than Expected: After almost a year removed from the final outbreak, sales levels remain 20%
below peak. While this represents an improvement compared to levels reached in December and January, it is not
inspiring, and we believe current levels are close to a new normal. We expect sales to be down mid-to-high double
digits from peak, and after cycling through weak compares in 2017, expect low single digit growth moving forward.
• Cost cuts allow CMG to regain some margin but comp growth key to further expansion: As a result of settling
into a potential new normal, CMG is adjusting staffing levels and as a result expects to push restaurant margins up
500bps to 20% in 2017 even with AUVs of ~$2 million and higher food safety costs. However, further comp growth will
be necessary to get back to low-to-mid-20s restaurant margins especially with wage inflation.
• Valuation Reflects a Growing Belief that Chipotle will not make a full recovery: Chipotle is trading at 42x our
2018 PE, which we believe represents a normalized year for earnings. This is optimistic and gives Chipotle credit for
returning to near peak AUV and margin levels. We believe that the upside of such a multiple does not justify the risk.
Scenario Analysis – May be entering a new normal
Catalysts
• Comp volatility: Customer
losses improve from 20%
currently to low doubles /
high singles
• Restaurant margins:
Significant cuts result in
20%+ margins
• G&A cuts: G&A still high
and there may be
opportunity for reductions.
• Risks
• Comp continues at current
pace or worsens:
Customers return at a slower
pace and comp declines
continue to be <(20%)
• Margin rate uncertain:
Margins delever and
management increases
spending to reverse decline,
and potentially slows down
unit growth
• Another outbreak occurs
Bull Case - $590 Base Case - $375 Bear Case - $225
38x ’18 EPS of $15.50 35x ’18 EPS of $10.68 25x ’18 EPS of $7.50
We’re Back Baby! Comps recover significantly
through 2017 as marketing efforts and passage of time
brings back customers. Comp growth accelerates to
mid-double digits in 2017 and restaurant margins go to
~23-24% and Chipotle accelerates the pace of unit
growth. AUVs return to pre-crisis levels in 2018.
New Normal. Customer recovery stabilizes towards
the end of the fourth quarter resulting in (20%)
customer losses due to food safety issues and
emerging competition. Base AUVs return to
approximately $2 million and restaurant level margins
are 20% in 2018. New stores continue to open up at
lower AUVs and margins
Growth Story Gone Wrong. The brand is tarnished
and customers continue to slowly trickle back. Sales
fail to recover and AUVs are ~$2 million in 2018.
Margins continue to lag as promotion is required to
drive traffic. Chipotle unit growth slows and CMG
receives a more normalized market multiple.
April 4, 2017
33
Page 34
Evercore ISI
625 820
1,085 1,332
1,518 1,836
2,270
2,731
3,215
4,108
4,574 4,501
3,904
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 LTM9/15
2015 2016
Chipotle (What it Was)
Comp Growth Chipotle’s has generated one of the highest comps in the industry and
showed its immense pricing power in 2014 with 16.8% comp driven
equally by transactions and check increase.
Restaurant Margins Restaurant level margins grew to an industry-leading level of 28% by
LTM Sep-15.
Sales Growth From 2005 through LTM 9/15 sales grew at a 20%+ CAGR consisting of
15% unit CAGR and 6% AUV growth.
Source: Company Data, Evercore ISI
10.2%
13.7%10.8%
5.8%
2.2%
9.4%7.1%
11.2%
5.6%
16.8%
8.1%
0.2%
-19.5%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 LTM9/15
2015 2016
Prior to its food safety issues, Chipotle was by most metrics the most
successful restaurant concept of the 21st century. Chipotle
revolutionized fast casual dining by providing customers higher-quality all-
natural products in an assembly line format, which maximizes efficiency.
The menu is simple and rarely changes, but is fully customizable resulting
in thousands of possible combinations. Since 2005, Chipotle has added
more than 1,500 locations with a compounded annual growth rate of more
than 15%, and with recent growth of ~11%. AUVs increased at a 6%
CAGR (with average comp growth of 9%) resulting in an AUV of $2.5
million as of September 2015, representing one of the highest of all QSRs
despite not offering breakfast. Comps accelerated in 2014 as increases in
commodity costs forced Chipotle to push through significant price
increases – yet, transactions also rose resulting in a 17% comp in 2014.
Comp slowed in 2Q15 and 3Q15 as the company was lapping very difficult
compares as well as potential customer fatigue, lack of product innovation
and newer restaurants which were less productive that may have weighed
on comp. However, CMG still was generating some of the most productive
and profitable restaurants in the industry.
April 4, 2017
34
18.2%
20.6%
22.0%21.5%
24.9%
26.7%26.0%
27.1%26.6%
27.2%27.7%
26.4%
12.8%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 LTM9/15
2015 2016
Page 35
Evercore ISI
Chipotle Food Safety Issues and the New Normal
EVR ISI Comp vs. Consensus Our long-run comp estimates are still short of Consensus as we believe
that CMG is beginning to enter a new normal.
Source: Company Data, Evercore ISI
Beginning in July, and cresting in 4Q15, more than 500 people in at least 12 states were sickened with E. Coli, Norovirus and Salmonella linked
to Chipotle food products. This series of outbreaks has done serious damage to the company’s brand and reputation especially due to its focus on all-
natural better-for-you ingredients.
What started as a brand perception issue related to the foodborne illness incidents that caused traffic decline, seems to have evolved into an
issue where the inability to recover traffic was partly driven by complexity that caused poor execution. Reducing complexity in any system is
generally a good thing to enable an enterprise for focus on more value added tasks, and if this reduction in complexity actually improves customer service
and pairs up with 2017’s marketing initiatives, the potential exists that CMG could begin to recover the AUV that they lost.
Almost one full year from the first Chipotle foodborne illness outbreak, the continued weakness in comp likely represents a new ‘steady state’
for the business. Outside of cycling the worst of the crisis in 1Q17, we believe future customer recoveries will be minimal making the 4Q exit rate of an
~(18-20)% decline in AUVs relative to pre-crisis levels likely the new norm. CMG 4Q comp was (4.8%) (or -5.3% excluding deferred revenue) and with
October, December and January all comping (20%) below pre-safety levels. The recovery has appeared to flat-line and CMG will be seeking to improve
the customer experience, continue to market heavily, and focus on digital to recover sales. While we believe that CMG can make some progress with
these initiatives, we do not believe sales will significantly inflect and expect low-single digit improvement from 4Q16 run rates resulting in approximately a
+13-14% comp in 1Q17 and an 8% comp in 2017, lower than the company’s high-single digit target. Thereafter, we expect low single digit positive comps
resulting in ~$2 million AUVs in 2018, vs. $2.5 million prior to the food safety issues.
April 4, 2017
35
Chipotle experienced significant food safety issues in 4Q15 causing comps to drop by (30%+) at the trough –
while these issues have been resolved,we believe the brand was tarnished resulting in impaired AUVs
10.4%
4.3%2.6%
-14.6%
-29.7%
-23.6%-21.9%
-4.8%
13.5%
7.5% 6.5%5.0%
8.0%
4.0%
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q161Q17e2Q17e3Q17e4Q17e 2017e2018e
Comp Growth Consensus
Comp Growth vs. Peak Levels Comps vs. peak levels have flat-lined, potentially signaling a new normal.
-23%-24%
-22%-20% -21%
-18%
-20% -20% -20%
-17%
-15% -15%
-30%
-25%
-20%
-15%
-10%
-5%
0%
Page 36
Evercore ISI
Chipotle: Margins in the New Normal
Historical and Projected EPS
RLM Bridge We do not believe that CMG will get to their stretch goal of 20% RLMs
due to lower comps and wage inflation. The more certain margin
enhancements included lower avocado costs (100bps) as prices have
already dropped, lower marketing and promos as a percentage of sales
(4.7% of sales in 2016 going down to somewhere in the ~3% range in
2017) due to burrito giveaways, BOGOs and Chiptopia from 2016. Higher
risk portions of margin enhancements include lower negotiated contract
prices, other restaurant P&L improvements (much of this item consists of
improved labor scheduling as stores are still inefficient), and sales
leverage from high single digit comps.
Up until the food safety issues, CMG has been in growth mode, which has
probably caused some escalation of expenses. Since CMG owns all of its
restaurants, a significant portion of these expenses will be at the store
level. The company had been insistent that it was not going to cut staffing
– now that tone has changed and we expect labor declines throughout
2017 resulting in a (3%) labor decline per store. However, mid-single digit
labor inflation will likely act as an offset to these cuts. CMG has also
reduced capex per store by 8% and has decreased its store growth target
from 240 in 2016 to 195-210 in 2017.
Source: Company Data, FactSet, Consensus Metrix, Evercore ISI
April 4, 2017
36
YoY Expense per Store Growth
3.3%
-6.3%
-2.8%
4.7%
11.9%
-11.0%
-6.0%-7.6%
-2.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
2015 2016 2017e
Labor per Avg Store Other OpEx per Avg Store G&A per Avg Store
13.5%
20.0%
18.7%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
Q416 RLM Lower CostAvocados
Lower Mktg /Promo
NegotiatedContracts
Other RestP&L
SalesGrowth
CMG FY17RLM Target
EVR ISIFY17 RLM
Higher Risk
$15.34
$1.17
$8.00
$10.65
$11.86
2015 2016 2017e 2018e 2018eConsensus
Page 37
Evercore ISI
Domino’s (DPZ), In-Line, Base Case $195
Investment Thesis
• Exceptional technology and marketing driven company: Domino’s is the digital leader in online / mobile
ordering with 50%+ of sales transacted online. Some international markets are over 70% online.
• U.S. QSR Pizza category is consistent, but losing share to other QSR formats. QSR pizza is highly
fragmented, with 45% of the market controlled by local competition. This enables share gains among the larger
national competitors who have scale in technology investment and marketing.
• Consistent approach and execution: Domino’s has found a winning formula– it does not offer limited time
offers and pricing remains consistent. Technology, product quality, operational efficiency and now a loyalty
program drive the business. This has resulted in 20%+ two-year stacked comp growth over the past four
quarters. Large international unit growth opportunity; globally under-developed category.
• Large international unit growth opportunity
Scenario Analysis – Breakout needs continued U.S. growth and FX easing
Catalysts
• Loyalty program provides the fuel
necessary to hold comps up
• Continued food deflation increases
franchisee profitability
• Unit growth acceleration in
international with conversions of local
brands
Risks
• Comp Growth: US comps most
correlated with employment. Change
in payrolls could slow comps.
• Labor: Labor in DPZ stores has
delevered due to wage inflation in
NYC market. Further labor inflation
could weigh on margins further.
• FX: 10% move would reduce
revenue by $15mn and EPS by $0.24
• Valuation: Expensive relative to
history and relative to its highly
franchised peers.
Bull Case - $230 Base Case - $195 Bear Case - $132
23x 2017e EBITDA of $585 21x 2017e EBITDA of $558 16x 2017e EBITDA of $530
The Moon Hits Your Eye Like A Big Pizza Pie.
Loyalty working with technology keeps the U.S.
comping at a HSD rate with favorable commodities
pushing store level margins to high-20s. International
segment adds stores at a low double digit rate and
domestic unit growth reaccelerates. Investors grab a
fresh slice of DPZ.
This Domino Does Not Fall. Strong marketing and
tech spend continue to allow DPZ to outcomp the
industry, but comps fall to MSD in 2017 as the
company can’t comp HSD forever. DPZ continues to
invest in the business helping growth but reducing
operating leverage. International continues to thrive
despite dollar headwinds.
Things Get Cheesy. Compares stiffen as ’12-’16
gains push comps to low single digits. Dairy prices
reverse and labor costs damages store level EBITDA.
International unit growth slows and global turmoil
makes the dollar a safe haven, reducing international
profits.
$186.98
$230
$195
$132
$80
$100
$120
$140
$160
$180
$200
$220
$240
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
April 4, 2017
37
Page 38
Evercore ISI
DPZ Taking Share in the U.S.
Source: Company Data, NPD , Nation’s Restaurant News, Evercore ISI
The QSR pizza category in the U.S. is very mature and established, with
limited category growth. For the last decade the total category experienced no
growth, with a slight acceleration since 2012. The pizza category is very
fragmented with local competition making up nearly half of the market, while the
four largest national chains make up nearly the other half; the local competition has
definitively been losing share.
The Domino’s U.S. business has been a real success story over the last 5
years. In 2009, Domino’s relaunched the brand domestically focusing on a simple
playbook - menu simplification, a focus on quality ingredients, with a simple pricing
structure not reliant on limited time offers. Following that, significant technology
investments as well as stores being remodeled into the ‘Pizza Theatre’ format, all
combined to drive system-wide sales up 50% in the following years. 60% of
Domino’s sales are initiated online vs. less than 20% in 2009 representing a
significant advantage over local competition. This has helped domestic comp
growth accelerate from less than 4% in 2012 to above 10% in 2016. This
productivity increase has significantly enhanced franchisee profitability while also
driving a 70% increase in domestic EBIT since 2011.
Pizza Hut17.1%
Domino's15.7%
Little Caesar's
10.3%Papa
John's8.5%
Next 6 Largest
7.1%
Mom & Pop
41.3%
Pizza Category Market Share The QSR Pizza category is highly fragmented, with local competition making
up 41% of the total market. Share gains in the category are coming at the
expense of local competition and the largest share holder, Pizza Hut.
U.S. System Sales and Comp Growth System sales have surged 50% since 2009 driven primarily by same
store sale increases.
10%
20%
30%
40%
50%
60%
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
Papa John's Pizza Hut Domino's
% of Sales Initiated Online QSR pizza has the highest penetration of online
sales of any restaurant category averaging ~55%
0%
2%
4%
6%
8%
10%
12%
14%
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
$5,500
$6,000
$6,500
2009 2010 2011 2012 2013 2014 2015 2016 2017e
U.S. Sales U.S. Comp
April 4, 2017
38
2011-'16 Market
Share Change
(bps)
2010-'16
CAGR
Mom & Pop (607) -1.2%
Pizza Hut (168) -0.3%
Next 6 Largest (65) -0.2%
Papa John's 173 4.5%
Little Caesar's 159 5.0%
Domino's 508 9.8%
US Pizza QSR 0.5%
Page 39
Evercore ISI
DPZ
QSR
SBUX
DNKN
PNRA
MCD
WEN
PZZA
SONC JACK
YUM
14x
18x
22x
26x
30x
34x
38x
7% 15% 23% 31%
NT
M P
E
Future Total Shareholder Return*
4.5%
11.2% 10.8%
18.6%19.5%
5.0%(0.4)% (0.4%)
7.8% 0.9%
2.3%
DomesticOp Inc
Int'l OpIncomeGrowth
SupplyChain Op
Inc Growth
Other OpExpenses
EBITGrowth
Int Expense/ Leverage
Net IncomeGrowth
Buybacks EPSGrowth
Dividend TSR
DPZ Valuation and Returns
Equal to 2016-2020 EPS CAGR plus current dividend yield. For QSR, SONC and PZZA, equal to consensus 2016e-2019e EPS CAGR plus dividend yield.
Source: FactSet, Consensus Metrix, Evercore ISI Estimates
DPZ has among the highest valuations among highly-franchised QSRs, and despite a 20% future
shareholder return, DPZ’s valuation appears full even as it successfully cycles comps.
2017 PE vs. 2016-2020 Total Shareholder Return DPZ looks to be modestly overvalued based on its future TSR.
2016-2021 Total Shareholder Returns 11% EBIT growth coupled with leverage, buybacks (some funded by additional debt) and to a lesser extent dividends result in a nearly 20% total
shareholder return.
6%7%
5%
4%
5%5%
8%
11%
15%
13%
11% 10%
6%
10%
13%12%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
Domestic Same Store Sales Domino’s has proven it can successfully cycle comps and loyalty is
providing the fuel
April 4, 2017
39
Page 40
Evercore ISI
Dunkin’ Brands (DNKN), Underperform, Base Case $49
Investment Thesis
• Strong Regional Brand With National Aspirations: Mature and dominant coffee chain in the Northeast. Most future
growth will need to come from new markets where the Dunkin’ brand is less established.
• Very Competitive Daypart: Renewed focus by QSR competition on the breakfast daypart has led DNKN to lose share,
and negative traffic after price increases shows a lack of pricing power..
• New markets are not productive putting long term growth opportunity at risk. AUVs in DNKN’s new South Central
and West regions have AUVs that are 30% lower than Northeast and Mid-Atlantic stores with single digit store margins.
If these economics continue, franchisee demand for new stores will decline jeopardizing DNKN’s growth strategy.
• Valuation priced at highly franchised QSR average: At 15x 2017 EV/EBITDA, valuation is comparable to franchised
peers despite lower growth, comp headwinds and competitive position. Total shareholder return (EPS growth plus
dividend yield) is acceptable at 11%, with leverage, buybacks and dividends contributing to 60% of growth.
Scenario Analysis – Competitive Daypart Limits Comp Growth
Catalysts
• Comp change has minimal
EPS impact, but has a
large impact on future
growth perception.
• Higher mobile order
adoption
• Indication that restaurant
profitability and growth is
improving in markets in the
Western U.S.
• Levered recap
Risks
• Geographical Risk:
Strongest in New England,
growth in new markets may
be slow
• Cost Pressure: Franchise
profitability impacted by
labor and coffee pricing
• Leverage: Optimal capital
structure, but refi risk with
rate increases
Bull Case - $55 Base Case - $49 Bear Case - $41
16x ’17 EBITDA of $485mn 14x ’17 EBITDA of $474mn 13x ’17 EBITDA of $450mn
Unit and Comp Growth Percolate. Fears of
breakfast daypart remaining challenged are overblown
and DNKN is able to generate consistent 2-4% comps.
Unit growth continues in the Western U.S. and the
Dunkin’ brand does well in new markets. Coke
partnership and K-Cup growth generates additional
profit growth.
Grinding LSD comp and unit growth. Traffic
remains squarely negative as franchisees continue to
take price in order to offset wage inflation. Comp
growth is flat to low-single digit, and unit growth also
slows to low-single digit causing EPS growth which
trails peers causing EBITDA multiple to slightly fall.
Growth Turns Into A Donut. Comps run down low-
single digit for 2017, as menu innovation and the
mobile order rollout go bust. However, comps turn
negative, and New England infill opportunity ends, and
new market growth slows to a low single digit rate.
EPS grows mid-single digits driven only by modest unit
growth and buybacks.
$54.60 $62
$49
$41
$30
$40
$50
$60
$70
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
April 4, 2017
40
Page 41
Evercore ISI
DNKN U.S. Business Challenges
Source: Company Data, Evercore ISI
65%
30%
5%
Evening (7-Close)
Afternoon (11-6PM)
Morning (4-11AM)
47%
32%
8%
11%2%
Northeast
Southeast
Midwest
West
U.S. Systemwide Revenue of
$8.2B
Mid-Atlantic
Sales By Daypart As would be expected, Dunkin’ sales highly
skew to the morning daypart due to its
beverage mix.
Stores By Region Dunkin’ Donuts is a very regional brand with
79% of system-wide revenue coming from
the Northeast and Mid-Atlantic.
Dunkin’ Donuts is a regional brand which is facing comp headwinds.
Nearly 50% of revenues for the Dunkin brand occur in the Northeast and 30%
occur in the Mid-Atlantic. Unlike its coffee shop peers, Dunkin’ evolved into a
company with a menu mix more heavily skewed toward beverages over the
course of several decades vs. its original incarnation as a coffee shop. As would
be expected, Dunkin’ does very well with beverages as a percentage of mix, and
it does very well with the morning daypart with over 65% of sales generated
before 11AM. However, it has not been successful in expanding outside of the
morning daypart. Dunkin’ has mostly tried to do that by rewarding its most
frequent guests, Perks members, point based incentives for visiting later in the
day or for purchasing food items. Despite a 1.4x increase in membership of the
Perks loyalty program over the past two years, comps remain below 2% and
traffic has been down 200+bps. DNKN has also have lagged the peer average
for eight of the nine past quarters despite outperforming in 4Q (2-year stack
underperformed by 500bps). Competitors have increasingly emphasized the
breakfast daypart and seem to have taken traffic and share from DNKN.
Franchisees also responded to current wage inflation with price increases,
further reducing traffic and demonstrating the lack of pricing power in the brand.
Perk Members There are 4.6 million DD perks members, and YoY
growth in 1Q was 64% - yet comp still trended
downward
0.75
1.31.8
2.52.8
3.23.6
4.34.6
4.95.4
6
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0
1
2
3
4
5
6
7
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
(mil
lio
ns
)
Perk Members Comp
Dunkin’ Comp Gap to Peers Dunkin’ is struggling to maintain comps amid peers who are likely
taking share
(173)
(54) (67)
20
2.0%
0.5%
1.2%
1.9%
(600)
(400)
(200)
-
200
400
600
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
DNKN Comp Gap vs. Industry (bps) DNKN US Comp (Consensus)
April 4, 2017
41
Page 42
Evercore ISI
DNKN Future Store Growth in the U.S. May Be Impaired By Lower Productivity
Source: Company Data, Evercore ISI
21.3% 21.1%
15.7%
14.2%
7.6%
19.8%
0%
5%
10%
15%
20%
25%
Northeast Mid-Atlantic Midwest Southeast South Central /West
Total U.S.
$600
$700
$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400
Northeast Mid-Atlantic Midwest Southeast SouthCentral /
West
Free Standing Shopping Center Gas & Conv.
Western Stores Have 25%
LowerProductivity
Store Level Operating Margin By Region We estimate store level margins to be 1/3 lower in the Midwest and
Southeast, and 2/3 lower in the West than in the Northeast
AUV By Format By Region Largely based on brand awareness and existing competition, Dunkin’
stores have productivity 25% lower than stores in established markets
We view the lower average unit volumes and lower margin rates in
the markets where Dunkin’ expects the most growth to be an
impediment to its growth plans. With average unit volumes 25% lower
than Dunkin’ stores in the Northeast, the store level profitability can be 2/3
lower than the profitability in a core market. As a result, Dunkin’ reduced
the initial franchise fee from $80-90,000 in more established markets to
$40,000 in areas with more limited representation of the brand. In
California, the company has previously offered a graduating royalty that
starts at 0.9% in the first year of the store operation, and escalated by a
point annually for 6 years before reaching the normal company rate of
5.9%.
We find it problematic for Dunkin’ brand’s future rate of growth that it
will need to rely on less developed markets in the South and West.
Currently, 65% of the growth in the brand is coming from ‘core’ and
‘established’ markets, and at current growth rates we believe these
markets will be exhausted in 2 and 6 years, respectively. The risk of
cannibalization increases in these markets as they become more
saturated. While 18% of the store base today is in emerging markets, and
in the west, if we believe in the long-run targets, it will represent 85% of
future growth. As the returns are lower in these markets, growth may slow
from the projected 4.4% growth in 2017 making organic growth and
current store performance a more important factor in DNKN’s long-term
algorithm.
Est.
Current
Stores
Est.
Remaining
Store
Opportunity
Current
Store
Growth Rate
Year to
Saturation
% of
Current
Growth*
% of
Future
Growth
Est.
Current
Pop.
Density
Future
Pop.
Density
Density
%
Decline
Core 4,174 175 100 1.8 26% 2% 1:8,650 1:8,200 (8)%
Established 2,890 785 140 5.6 36% 9% 1:18,600 1:14,600 (27)%
Emerging 1,334 2,850 90 31.7 23% 33% 1:66,500 1:23,000 (69)%
West 430 4,900 60 81.7 15% 56% 1:302,000 1:25,000 (94)%
Total 8,828 8,710 390 22.3 100% 100% 1:35,000 1:18,300 (51)%
Dunkin Store Saturation The Northeast is near saturation and future growth will come from
‘Emerging’ and Western U.S. markets
April 4, 2017
42
Page 43
Evercore ISI
$600
$900
$1,200
$1,500
Northeast Mid-Atlantic Midwest Southeast SouthCentral /
West
Total U.S.
2013 2014 2015
(30)
70
(26)(40)
50
15 10
70
(80)
40
(30)
(8)
(100)
120
(79)
(20)
60
(37)
(150)
(100)
(50)
-
50
100
150
CoGS Labor Store Margin
Yo
Y L
evera
ge (
BP
S)
Northeast Mid-Atlantic
Midwest Southeast
South Central / West Total U.S.
152
272
362
$984
$992
$965
$940
$960
$980
$1,000
0
50
100
150
200
250
300
350
400
2013 2014 2015
AU
V (
$000s
)
# o
f U
nit
s
Units AUV
21.1% 21.3%
14.9%14.1%
6.8%
19.5%
0%
6%
12%
18%
24%
30%
Northeast Mid-Atlantic Midwest Southeast South Central/ West
Total U.S.
2013 2014 2015
DNKN FDD Update
The 2015 DNKN Franchise Disclosure Document showed smaller AUVs and lower margins for South
Central / West stores despite unit growth – this refutes the maturing market argument.
Source: Dunkin Donuts 2013-2015 Franchise Disclosure Statements, Evercore ISI
AUVs by Region Overall AUVs were flat but declined by (3)% in South Central / West stores.
Store Margin by Region Store margin declined by 30bps with South Central/West store margin
declining by 80bps.
Labor and CoGS Leverage by Region Labor deleverage of 60bps offset CoGS leverage of 20bps resulting in
lower margins.
2013-2015 South Central / West AUV and Unit Growth AUVs for South Central / West stores declined despite unit growth. This runs
contrary to the idea the area is maturing as a market.
April 4, 2017
43
Page 44
Evercore ISI
Jack in the Box (JACK) – In-Line, Base Case $103
Investment Thesis • Primarily a refranchising story with good visibility into G&A reductions, buybacks, and EPS growth. JIB franchise % is
expected to go from 81% currently to ~86% in 2017 and ~93% by 2018. G&A is also being reduced to 2-2.5% of system-wide sales,
and JACK is levering its balance sheet by 1x+ turn. We expect JACK to return nearly $0.5Bn to shareholders in 2017 representing
~15% of the market cap while also growing EPS at a mid-double digit CAGR through 2020e.
• Jack brand seems stronger, but traffic remains negative: Investments in improving food quality and better marketing seem
to be doing well for the brand. The QSR category remains extremely promotional forcing Jack to speak more to value than it that it
has historically done, but ticket driven by price has been the primary driver of SSS, while traffic remains negative. Pricing outpacing
negative traffic may not be a durable strategy.
• Qdoba a unit growth story, with low AUVs: Qdoba has a below-industry AUV of $1.2mn, mid-teens RLMs and a geographically
dispersed footprint likely not appropriate for a 700+ restaurant system. While significant unit growth potential exists, the inability to
drive comp and recent margin deterioration call into question if future growth will generate sufficient future return to justify investment.
• Reasonable valuation with upside from re-franchising: JACK is trading at 12x FY17 EBITDA and 23x FY17 PE. JIB
refranchising is EPS accretive, but Qdoba performance could weigh on the multiple.
Scenario Analysis
Catalysts
• Comp Recovery: Traffic
recovers to flat and check pushes
3% comps.
• Qdoba recovers: Issues prove
to be more transient than secular,
and marketing, remodels, and
loyalty drive LSD comps.
• Refranchising/ G&A / Unit
Growth: Refranchising initiatives
complete, G&A cut by $40-$50
million, Qdoba unit growth of 10-
12%, JIB restarts growth.
Risks
• Competition: Increased
competition and promotional
landscape causes continued
share loss and comp decline.
• Qdoba generates low returns.
Comps continue to be negative,
margins compress and new units
generate lackluster returns.
• Wage and Commodity Inflation:
Commodities reverse and the
company is unable to offset wage
inflation, which reduces margins.
Bull Case - $133 Base Case - $103 Bear Case - $73
14x 17e EBITDA of $380 12x ’17e EBITDA of $361 10x ’17e EBITDA of $340
No Longer on the Value Menu. Comps recover to
3% at JIB and initiatives at Qdoba push comps to 3%
in 2H17. RLMs expand as it benefits from a
commodity environment and JACK accelerates G&A
cuts, refranchises to 95% and increases leverage and
buybacks to generate double-digit EBITDA growth and
20% EPS growth.
The Value is Starting to Show. JIB comps recover to
2-3%, Qdoba comps flat in 2017, and RLMs recover as
disruption fades. JIB completes refranchising and cuts
G&A to the midpoint of its 2.3% system sales range.
Qdoba resumes unit growth at 8-9% and JACK
generates high-single digit EBITDA growth and high
teens EPS growth in 2017-2018 but 2018 EBITDA falls
short of $400mn target.
Ain’t Got Jack. Comps remain flat at JIB as
transaction declines offset check. Qdoba continues to
comp negative and RLMs remain in the low teens as
commodities provide little benefit, labor delevers and
new units have lower AUVs. The company completes
its initiatives but generates unimpressive returns on
Qdoba expansion and stock rerates.
$102.38
$133
$103
$73
$50
$60
$70
$80
$90
$100
$110
$120
$130
$140
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
April 4, 2017
44 Source: Company Data, Evercore ISI
Page 45
Evercore ISI
2.5x
3.0x
3.4x3.8x 3.8x 3.6x
4.0x
5.0x
2015 2016 2017e 2018e 2019e 2020e 90%Refranch
Guide
95%Refranch
Guide
JACK Financial Levers
JACK is pulling all of its financial levers refranchising JIB, increasing leverage and reducing core G&A,
which will significantly increase capital returns and result in a projected 2016-2020e EPS CAGR of 17%.
JIB Franchising % JIB franchise % is being increased to a near target of 90% (from 82%
currently) with a longer-term target of 95%.
Core G&A Reduction JACK is reducing core G&A (exc. advertising) from 3.9% to 2.0-2.5% of
system sales – we project 2016-2020 G&A reduction of $42million.
Future Capital Returns We project that JACK will return nearly ~$0.9 billion to shareholders from
2016-2018 representing ~28% of the current market cap.
Total Debt/EBITDA JACK intends to increase its leverage from 3.0x today to 4.0x
(assuming 90% franchised) and potentially 5.0x (assuming 95%
franchised).
April 4, 2017
45
75.7%
79.3%80.8% 81.6% 81.5%
85.6%
93.0%94.1% 94.2%
60%
65%
70%
75%
80%
85%
90%
95%
100%
2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
JIB Franchised % Overall Franchised %
3.8% 3.9%3.4%
2.7%2.3% 2.1% 2.0%
2.0%-2.5%
$146 $162
$146
$120$107 $103 $104
$0
$25
$50
$75
$100
$125
$150
$175
$200
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
G&A % of Syst Sales Core G&A
$40 $42 $44 $48
$440
$375
$200 $200
$325
$480
$417
$244 $248
$279 $250
2016 2017e 2018e 2019e 2020e
Dividends Buybacks Debt Issuance
Source: Company Data, Evercore ISI
Page 46
Evercore ISI
JIB – Comping Positive but Traffic is Negative
Source: Company Data, Evercore ISI
MCD Comp vs. JIB Transactions Growth JIB comps fell as MCD gained traction with its All-Day Breakfast launch
but is now cycling this change
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
JIB Transactions MCD U.S.
14117
7000
5722
3600 2986
2255
McDonald's Burger King Wendy's Sonic Carl's Jr /Hardee's
Jack-in-the-Box
JIB Unit Count Comparison Jack-in-the-Box is more of a regional concept than its competitors
While JIB has recently outperformed the industry, this has been
driven by 3%+ check increases offset while transactions have been
and continue to be negative. Comps have accelerated punctuated by a
3.1% system comp in 1Q17, but JIB has been negatively impacted by
competitive pressures and a weak industry as well as MCD’s launch of All-
Day-Breakfast as it was one of the only concepts to sell breakfast food in
all day parts. Promotional activity in the industry seem to be at all-time
highs, but JIB has chosen not to significantly focus on value while also
taking 3% price allowing them to generate 3-5% ticket growth, which has
likely had a negative impact on traffic. We expect comps to recover from
February lows, as some issues are temporary (delay in tax refund receipts
and flooding in CA) as well as a focus on a more high-low strategy by
emphasizing high quality items along with its Declaration of Delicious
campaign while pulsing in value offers. Longer-term, JIB is looking to
position itself as a QSR+ brand similar to a Chick Fil-A or In’N Out.
JIB is a super-regional brand, and the fact that 31% of its stores are in TX
also may negatively impact performance due to weak economic conditions
associated with the decline in oil. Additionally, 42% of its stores are in CA,
which may pressure margins as minimum wages increased by ~11% at
the beginning of 2016. However, the company has stated that it does not
view JIB has a purely regional brand and intends to restart growth.
April 4, 2017
46
Quarterly System Comp and Transaction Growth JIB comps fell as MCD gained traction with its All-Day Breakfast launch
but is now cycling this change
1.4%
0.0%
1.1%
2.0%
3.1%
-0.3%
2.8%2.6%
-2.0%
-1.4%
-2.4%
-1.5%-1.8%
-4.3%
-1.2%
-0.4%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17e 3Q17e 4Q17e
System Comp Est. System Traffic
Page 47
Evercore ISI
Qdoba – Growth Potential but Facing Operational Issues
$1,221
$2,000
$1,555
$1,205
Qdoba CMG* Taco Bell Baja Fresh
$11.75
$11.30
Qdoba CMG*
20.7%
18.7%
Qdoba Exc. D&A CMG*
U.S. AUV Comparison
Avg Check Comparison
Store Margin Comparison
40% lower
5% higher
200bps lower
Qdoba comps have turned negative vs.
long-term targets of 4-5%. In 2016, Qdoba’s
focus on product innovation resulted in positive
traffic but average check fell (0.4%) resulting in
a company-owned comp of 1.7%. However,
comps have turned negative with an expected
(1)-(2)% comp in the first half with an
expectation of flat comps in 2017 driven by
product innovation and loyalty. Some of the
comp weakness has been due to execution
and restaurant complexity issues, but these
will likely take time to resolve. JACK set a
longer-term system comp target of 4-5%
driven by a product innovation, a remodel
cycle, technology and outsourced delivery –
but this is a long way away. At the same time,
margins have fallen significantly to low-teens
including D&A.
Qdoba’s productivity still significantly
lower than CMG and less than half prior to
its food safety issues Qdoba’s AUV of $1.2
million pales in comparison to CMG’s 2014
AUV despite having a higher ticket. In order to
narrow the gap, Qdoba needs to increase
brand awareness. The concept is currently
spread very thin with 712 locations in 48
states, and increasing concentration in existing
successful areas should help. We do not
believe that Qdoba will approach CMG AUV
levels any time soon. Restaurant margins
including D&A are higher, but this is due to
CMG’s recent 20% decline in AUVs
Qdoba’s guided to a 10-12% long-term
growth rate but lowered the 2017 guide to
8%. Growth will primarily be in-fill as the
company’s current footprint is rather scattered,
but will also be capital intensive resulting in
$70-$90 million of new store capex in 2018e-
2020e.
* 2017 figures used for CMG
Source: Company Filings, Evercore ISI
Historical and Projected Unit Count
525 583
627 615 638 661 699 753
843 938
1038
Company-Owned Franchised
1.9%
-1.3% -1.1%-0.3%
1.3%
3.7%
0.4%
0.7% -2.5%-3.5%
-1.5%
0.5%
9.8%
7.4%6.4%
5.4%
-0.8% -1.1%0.0%
0.3%0.7% 1.0% 1.0%
1.5%
12.9%
7.0%6.6%
6.1%
1.5%
3.1%
1.0% 1.2%
-1.4%-2.0%
0.0%
2.5%
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17e 3Q17e 4Q17e
Transactions Average Check Catering
Quarterly Comp Composition
April 4, 2017
47
Page 48
Evercore ISI
DNKN
JACK
MCDPNRA
QSR
SBUXWEN
YUM
SONC
PZZA
8x
10x
12x
14x
16x
18x
2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
EV
/2017e E
BIT
DA
Future EBITDA Growth*
19.7x
17.8x
15.5x 15.5x 15.0x14.1x 13.8x
11.8x 11.2x
DPZ QSR YUM PZZA DNKN WEN MCD JACK SONC
DNKN
DPZ
JACKMCD
PNRA
QSR
SBUX
WEN
YUM
SONC
PZZA
15x
20x
25x
30x
35x
40x
-1% 0% 1% 2% 3% 4% 5% 6%
2017 P
E
2017e Comp Growth
JACK Comparative Valuation
JACK’s valuation is below peers on an EBITDA and earnings but this is due to the asset-heavy nature and
operational issues of Qdoba.
EV / EBITDA Multiples JACK’s EV/EBITDA is at the lower end of its highly-franchised peers
* For companies in our coverage universe, Future Total Shareholder Return defined as 2016e-2020e EPS CAGR plus current dividend yield. For QSR, SONC and
PZZA equal to consensus 2016-2019e EPS CAGR plus current dividend yield. Future EBITDA Growth equal to 2016-2020 EBITDA CAGR for companies in our
comp universe. For QSR, SONC and PZZA equal to consensus 2016e-2019e EBITDA CAGR
Source: FactSet, Consensus Metrix Evercore ISI Estimates
2017 PE vs. 2017 Comp JACK looks to be slightly undervalued based on future comp growth
2017 PE vs. Future Total Shareholder Return* JACK’s is appears to be undervalued based on its future shareholder return*.
2017 EV/EBITDA vs. Future EBITDA Growth JACK’s future EBITDA growth does not look to justify its low future
EBITDA multiple.
April 4, 2017
48
DPZ
QSR
SBUX
DNKN
PNRA
MCD
WEN
PZZA
SONC JACK
YUM
14x
18x
22x
26x
30x
34x
38x
7% 15% 23% 31%
NT
M P
E
Future Total Shareholder Return*
Page 49
Evercore ISI
McDonald’s (MCD), In-Line, Base Case $132
Investment Thesis
• Sustainable traffic growth has proven elusive: After four consecutive years of U.S. customer count declines, MCD is
simplifying its value focus, improving food quality and implementing Experience of the Future. This three-pronged strategy is
focused on enhancing both the product and experience of MCD with items like signature burger and chicken products while
also offering mobile order and pay and delivery. However, the U.S. QSR market remains more competitive than the Int’l Lead
Segment where this strategy worked, and it remains to be seen if these initiative can turnaround U.S. traffic.
• High Quality Consumer Name: High quality and well-known consumer equity with strong recurring cash flows due to its
highly franchised and geographically diversified asset base and low leverage. Limited operational volatility makes equity
volatility more similar to consumer staples than the average restaurant stock. The 3% dividend yield provides downside
protection and equity support.
• Absent a levered recapitalization, returns are likely to trail its restaurant peers: We expect returns to equal ~7% of the
market cap over the near-term equating to $23B in returns over the next three years. MCD’s leverage ratio is presently ~3x,
which is very low compared to other highly franchised restaurants. The argument against higher debt levels is that by owning
its real estate and charging percentage rents, MCD has more operating leverage in its model than a typical franchised chain.
Scenario Analysis – EPS Growth rather than Comp Key to Breakout
Catalysts
• Comp acceleration despite tough
compares in 2017.
• MCD able to push through pricing
when coupled with commodity
deflation results in an increase in
operating margin.
• Dollar weakens, global economy
improves reversing losses from
2015 causing outsized growth
• Additional G&A Cuts / increases
leverage.
Risks
• Share Losses: MCD reverts to a
share donor as it reaches an AUV
ceiling and does not increase
footage growth
• Domestic Wage Inflation: Wage
inflation without offsetting pricing
pressures franchisee margins
• FX and Global Risk: 66% of
sales and 50% of profit are outside
US.
Bull Case - $149 Base Case - $132 Bear Case - $106
15x ’17e EBITDA of $9.9Bn 14x ’17e EBITDA of $9.5Bn 12x ’17e EBITDA of $9.4Bn
I’m Lovin it. Comps accelerate in the U.S. due to
Experience of the Future, value simplification and
product improvements. International Lead continues to
exhibit strength with global comps of 3-4%.
Commodities remain favorable, MCD cuts G&A more
than target and margins lever resulting in low-to-mid-
double digit EPS growth and multiple expands.
Special Sauce. Traffic stabilizes at 0-1% as MCD
loses some share and takes a little price to get to
~2% comp growth. With commodity flat, pricing
and some wage inflation, margins are also flat
resulting in low-to-mid single digit EBIT Growth.
Buybacks increase EPS growth to mid-to-high
single digits and MCD receives a slightly lower
multiple than restaurant peers.
Hamburglar Returns. ADB proves to be a one-time
bump, and EOTF fails to stem traffic declines. Margins
compress and MCD trims its store base in the U.S. and
around the world. Global headwinds negatively impact
MCD international operations and buybacks result in
flat to low-single digit EPS growth.
$129.43
$154
$132
$105
$80
$100
$120
$140
$160
Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17
Source: Company Data, Evercore ISI
April 4, 2017
49
Page 50
Evercore ISI
MCD: Snapshot - Where MCD Is At
Source: Company Data, FactSet, Technomic, Evercore ISI
McDonald’s is the world’s largest restaurant system, and is a fairly ubiquitous
part of the QSR experience globally. While the company has the highest AUVs
of its burger chain peers globally, it struggled with complexity and bureaucracy from
2012 to early 2015, and the traffic struggled to exhibit growth.
These issues culminated in management change and a restructuring of the
business in mid-2015. MCD has reported some very encouraging progress in its
turnaround after years of underperformance relative to peers. Some of the factors
that drove the turnaround are in place like all-day breakfast, the relaunch of the
value menu with a 2 for $2 price point and 2 for $5, and menu simplification. Other
initiatives like the ‘Experience of the Future’ platform that requires reimages and
technology store investments, the launch of a mobile app, and installation of self-
orderings kiosks, which will be projects for 2017 and beyond.
Turnaround has taken hold in international markets, with the focus turning to
the domestic markets. Turnaround strategy to be focused on disciplined value,
product improvements and most importantly customer experience enhancements.
MCD is implementing Experience of the Future across the U.S. system (completed
by 2020) allowing for kiosk ordering, better pickup and table service as well as
launching mobile order and pay, a revamped loyalty program and 3rd party delivery.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
201
0
201
1
201
2
201
3
201
4
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
United States International Lead Markets
High Growth Markets Foundational and Corporate
Years of Global Deceleration..
Turn Around Plan MCD reverts to a share donor as it reaches an AUV ceiling and does not increase footage growth
Can Modernization
accelerate comps?
System Wide Comp Trends MCD struggled globally for several years amid complexity and bureaucracy
that crept into the system.
MCD US Comp Gap vs QSR Burger Peers MCD recently gained back share due to all-day breakfast, but those share
gains appear to be fading as some of the benefit may be temporary.
MCD FY2 EV/EBITDA and Relative Valuation MCD valuation slipped as its highly franchised peers were experiencing
multiple expansion. MCD valuation expanded greatly due to topline and
margin expansion – valuation has come in due to domestic comp pressure.
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
1Q
07
3Q
07
1Q
08
3Q
08
1Q
09
3Q
09
1Q
10
3Q
10
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13
3Q
13
1Q
14
3Q
14
1Q
15
3Q
15
1Q
16
3Q
16
April 4, 2017
50
0.6x
0.9x
1.2x
1.5x
1.8x
6x
9x
12x
15x
Rela
tiv
e F
Y2 E
V/E
BIT
DA
FY
2 E
V/E
BIT
DA
FY2 EBITDA FY2 Relative EBITDA
Page 51
Evercore ISI
MCD Valuation and Earnings Algorithm
MCD is currently trading at an NTM EBITDA and PE multiples that are 21% and 13% above its 5-year averages
due to margin expansion, franchising and strength in the overall market. In order to breakout of current levels,
we believe MCD will have to generate low-single digit comps and sustain double-digit earnings growth. We believe
that this level of growth is possible in the near-term, but high single digit growth is more likely in the long-term driven
by a 3-4% EBIT CAGR and buybacks.
$7,881
$9,106
(108)
407
(319)
609
(595)
485
(7)
650
2016 EBIT U.S OwnedProfits
U.S.Franchised
Profits
Int'l LeadOwned Profits
Int'l LeadFranchised
Profits
High GrowthOwned Profits
High GrowthLead Profits
FoundationalProfits
G&A and Other 2020 EBIT
$5.54 $6.05
$6.50
$7.08 $7.65
$8.29
14.4%
9.1%
7.5%
9.0%
8.0% 8.4%
0%
3%
6%
9%
12%
15%
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
2016 2017e 2018e 2019e 2020e 2021e
Non-GAAP EPS YoY Growth
2016-2020e EBIT Bridge
Projected EPS and Growth
21.3x
13.9x
8x
10x
12x
14x
16x
18x
20x
22x
24x
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
NTM PE NTM EV/EBITDA
Historical EV/NTM EBITDA and NTM PE
Source: Company Data, Evercore ISI
April 4, 2017
51
Page 52
Evercore ISI
$278.13
$266
$230
$160
$100
$125
$150
$175
$200
$225
$250
$275
$300
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Panera Bread Company, In-Line, Base Case $230
Investment Thesis
• Delivery and Panera 2.0 drives mid-single digit comps: 2.0 initiatives which include kiosks, table delivery and better
‘Rapid Pick-Up’ have accelerated comps resulting in 300+bps of outperformance vs. peers. Delivery is expected to further
accelerate comp growth as it is rolled out to 35-40% of the system by then end of 2017 and can lift AUVs by potentially
10%. This coupled with 2.0 and catering growth should allow PNRA to continue to beat the industry but cannibalization
within channels could prevent substantial acceleration.
• 2.0, delivery, and technology investments and wage inflation have pressured margins: Despite the strong comp,
restaurant level margins have declined by nearly 300bps since 2013 causing net earnings to drop and EPS to grow mid-
single digits due to buybacks. Delivery is labor intensive, and even with a strong comp, restaurant margins may expand,
but PNRA should lever other fixed costs.
• Valuation Prices in High Likelihood of Bull Case: Due to the recent surge in stock price, partially aided by M&A
speculation, PNRA trades at 14x 2017 EBITDA and 337 2017 PE, a significant premium to peers on a PE basis despite
having higher ownership (more volatile earnings streams). Without M&A, significant margin expansion would be required
to justify this valuation.
Scenario Analysis – Margin and Comp Working Together Key to Breakout
Catalysts
• Delivery: Delivery drives
comp acceleration from
current levels.
Restaurant Margins:
Commodity deflation
continues, labor inflation
eases and comp causes
margins to recover back to
pre-2014 levels.
New unit growth accelerates
as delivery and lower
investment increases
opportunity.
Risks
• Pricing driving comp:
Customers react negatively to
pricing increases reducing
transaction growth.
• Labor: Lower franchise
percentage makes PNRA
earnings more susceptible to
labor inflation.
• Higher price point: May
result in greater susceptibility
to economic downturn / trade
down.
Bull Case - $266 Base Case - $230 Bear Case - $160
33x ’17 EPS of $8.08 30x ’17 EPS of $7.64 22x ’16 EPS of $7.25
Fast Quality. 2.0 initiatives and delivery accelerate
comps to 5%+, and franchise comps also expand
due to 2.0 conversions. The company expands
delivery to most of the system. Labor expense growth
eases, which compounded by commodity deflation
and fixed cost leverage, causes 30-50bps of
restaurant margin expansion and 20% EPS growth.
Keeping it Casual. Comps grow at approximately
4% in 2017e, and 3-4% moving forward. Restaurant
margins are slightly up in 2017e as continued wage
inflation and investment offset comp growth, and
EBITDA grows high- single digits causing low-to-mid-
double digit EPS growth. Investment continues in the
out-years limiting EPS potential.
Panera 0.0. Panera’s pricing offsets 2.0 initiatives,
and delivery doesn’t have a significant impact
causing comps to decelerate back to <3%, and
transactions to decline. This coupled with higher
labor and technology investment causes margins to
delever resulting in mid-single digit earnings growth
in 2017e. The multiple compresses to 22x.
Source: Company Filings, Evercore ISI
April 4, 2017
52
Page 53
Evercore ISI
19.6%20.1%20.7%
19.8%19.9%18.5%
16.3%16.6%16.8%
18.9%19.3%20.2%
19.6%
17.9%
16.3%16.7%2
00
1
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
*
20
14
20
15
20
16
PNRA Capacity Problem and Solution
*2013 adjusted for 53rd week
Source: Company Data, Evercore ISI
Historical and Projected AUVs From 2001 to 2015, AUVs grew by 60% resulting in a CAGR of 4%, but
developed a traffic issue as stores reached near-capacity levels.
$1,577
$2,685
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13*
20
14
20
15
20
16
Historical and Projected Restaurant Margin To increase capacity, stores needed an investment in labor and margin
which reduced margin.
Company-Owned Comp Growth and Traffic As stores reached capacity, comps and traffic suffered.
-4%
-2%
0%
2%
4%
6%
8%
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13*
20
14
20
15
20
16
Company-Owned Comp Transaction Growth
Panera was one of the first fast-casual concepts offering customers
restaurant-quality food at a lower-price point in a fast-casual format
The company was able to grow AUVs by 70% from 2001 through 2016,
and surpassed the $2.7 AUV level in 2016 while also increasing unit
count by 8x.
However, PNRA because a victim of its own success as restaurants
reached capacity resulting in long lines and higher levels of incorrect
orders. Transaction growth went negative in 2013 and was essentially
flat in 2014 while company-owned comp growth was below 3% in both
years.
In response, PNRA launched its Panera 2.0 initiative which introduced
kiosks in stores, increased labor to address throughput issues and
allowed PNRA to satisfy the demand of its current omni-channel
initiatives. PNRA also launched rapid pickup in all stores where
customers can order and pay online as well as delivery which is currently
the most significant comp growth driver.
While these initiatives have reaccelerated comp growth to above 4%, it
has also reduced restaurant margin by ~350bps causing a reduction in
operating margin with 2017 being the first year in which EPS is expected
to surpass 2013 levels.
Traffic Struggled
Investment to Boost
Traffic
April 4, 2017
53
Page 54
Evercore ISI
19.6%
17.9%
16.3%16.7% 16.8% 17.1%
2013 2014 2015 2016 2017e 2018e
1.5%
2.4%
3.8% 3.6%
6.2%
4.2%
3.4%3.0%
0.1%
1.1% 1.0% 1.1%
2.4%
0.4%
-1.5%
-0.7%
1.5%
0.8%1.2%
1.7%
4.2%
2.4%
0.9% 1.0%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Comp Growth Transaction Growth Entrée Growth
PNRA Comps, Margins and Valuation
Source: Company Data, Evercore ISI
The company has been able to outperform the industry by 400+ basis
points over the past four quarters driven primarily by 2.0 transformations,
the rollout of delivery and some pricing. The success of these initiatives
can also be seen in the comp gap between company owned and
franchise comp gap which is at 400+bps, near record levels.
Delivery is currently in ~20% of company owned stores, and PNRA
expects to launch delivery to 35-40% of the system or 450-550 stores in
2017. Delivery sales have shown to be 10% of sales in test stores with
80-90% of sales being incremental.
However, traffic, traditional transaction growth or entrée growth, has
declined recently despite increased rollout of delivery and maturation of
2.0 stores. While we believe this is primarily due to softness in the
industry, there is likely some cannibalization between initiatives.
Restaurant margins declined by 300bps from 2013-2015 as the company
significantly invested in labor as part of its 2.0 initiatives. Margins have
increased in 2016 largely due to commodity deflation and refranchising.
We expect wage inflation and labor costs associated with delivery to
offset future comp leverage.
NTM PE multiple has increased by nearly 20% since October and is also
20% above highs, and is 6% above its relative NTM PE vs. the S&P.
Company-Owned Comp and Traffic PNRA has generated 3%+ comps for the past 5 quarters, but traffic has
dipped – we believe initiatives are sufficient to drive 3.5%+ comp growth.
Restaurant Margins After three years of margin declines, 2016 margins are expected to increase
slightly and we expect margins to be flat to barely up moving forward
depending on comp growth.
April 4, 2017
54
Company Owned Comp Composition We expect comp to be primarily driven by pricing, catering and delivery –
but there appears to be some cannibalization between initiatives.
1Q16 2Q16 3Q16 4Q16 2016 2017e
Pricing 2.9% 2.2% 2.4% 1.8% 2.3% 2.0%
Est. Catering / Mix 0.9% 1.6% 0.7% 0.8% 1.0% 0.8%
Easter Shift -0.5% 0.5% 0.0% 0.0% 0.0% 0.0%
Delivery (est) 0.0% 0.1% 0.5% 1.0% 0.4% 1.5%
Other Entrée Growth 2.9% -0.2% -0.2% -0.6% 0.5% -0.2%
Total Company-Owned Comp 6.2% 4.2% 3.4% 3.0% 4.4% 4.1%
Page 55
Evercore ISI
1.5% 1.5%2.0% 2.0%
0.8% 1.0%1.0% 1.0%
0.9%1.2%
0.9% 0.6%1.0%
2.0%2.5% 3.2%
4.2%
5.7%
6.4%6.8%
2016 2017e 2018e 2019e
Base Comp Catering Comp 2.0 Comp Delivery
PNRA - Quantifying the Bull Case on The Business
Future EPS Sensitivity on Restaurant Margins The Bull Case also revolves around recovering margins to where they were
prior to the most recent investment cycle. We believe that margins will only
lever slightly as initiatives like delivery and wage inflation will require
incremental labor and marketing investments. However, if the company
were to get back to 20% RLMs in 2020, we estimate an EPS of more than
$15 (vs. EVRISI at $12), but this would still imply an 18x PE ratio.
Projected Potential Comp Buildout If delivery rolls out to 90% of its stores over four years, PNRA’s comp could
reach 7% by 2018 with in-store business providing a 4% comp
Catering Growth and Comp Contribution Catering continues double digit growth
The Bull Case: Big cumulative impact from 2.0, catering and delivery drives
outsized comps, while CPG grows into a large business.
At 4Q16’s 12% catering growth rate, it would contribute ~80bps to
comp in ’16: If catering accelerated to 20% growth – catering would
contribute ~130bps of comp.
Delivery: Assuming delivery is rolled out to an incremental 20% of
company-owned stores, contributes 10% to system sales with minimal
cannibalization provides 150-200bps to comp.
We get the bull case at a 7% comp: But, delivery is still early in its rollout,
we need to assume 2% base growth (pricing), and don’t contemplate
negative transaction growth which occurred in 6 straight quarters from 4Q12
to 1Q14.
CPG is the gravy on the bull case: The move to a co-pack would move up
the margin rates, and in the $1B business scenario adds $4.50.
Conclusion: We don’t believe the bull case conclusions on growth are
necessarily incorrect. But, we think that from a discounting standpoint, too
much emphasis is put into very near term impacts versus the long tail of
growth that we expect.
1%
9%
12%
14%
11%
14%
11%12%
10%
12%
0%
3%
6%
9%
12%
15%
0
20
40
60
80
100
120
140
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
20
15
20
16
Yo
Y In
cre
as
e (
%)
Ca
teri
ng
Co
mp
Co
ntr
ibu
tio
n (
bp
s)
Catering Growth Estimated Comp Contribution
Source: Company Data, Evercore ISI
April 4, 2017
55
$5.89
$7.64 $9.05 $9.80
$10.68
$12.08
$15.32
32.6x
27.6x25.5x
23.4x
20.7x
16.3x
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
35.0x
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
2012RLM:20.2%
2017eEVRRLM:16.9%
2018eEVRRLM:17.1%
2018eRLM:18%
2018eRLM:19%
2020eEVRRLM:17.1%
2020eRLM:20%
EPS PE
Page 56
Evercore ISI
Starbucks, SBUX, Outperform, Base Case $66
Investment Thesis
• Strong topline growth: We believe Starbucks can generate multiple years of mid-single digit comp growth driven by increasing
beverage innovation, loyalty penetration, food attachment and technology utilization. We believe the Starbucks focus on adding
higher quality food is in its early stages, with the opportunity to continue to help ticket.
• Pricing power due to premium brand: Starbucks likely has the best pricing power in the restaurant space even if they decide to
use it. Even though the company typically only takes 1-2% price annually, we think demand is relatively inelastic on this premium, yet
low ticket item. New Roastery and Reserve stores reinforce brand perception further cementing pricing power.
• Asia is an under-developed region and strong growth opportunity. Revenues can double and EBIT can nearly triple in Asia due
to strong topline growth (especially in China) and leverage of fixed expenses.
• Focus on Americas margin rate, misses corporate margin gains. Double digit unit growth in CAP and continued comp growth
should significantly lever fixed expenses resulting in an expected 800-900+bps in margin. This coupled with continued operating
leverage in Channel Development (primarily in CoGS and other opex) and Americas topline growth should offset continued labor and
technology investments in the U.S. This will result in higher margin rate for the company even if Americas segment margins don’t
move or are under pressure.
Scenario Analysis
Catalysts
• Comps: Beverage innovation
coupled with technology (rewards,
payments, personalization) and
food attachment reaccelerates
comps.
• Margin Growth: SBUX eases
back investment levering comps
and increasing margin.
• Asian Opportunity: China comps
accelerate, Japan recovers
resulting in outsized growth.
Risks
• Maturing US assets: Growth
initiatives stall and comps decline
to low -single digits.
• Coffee price volatility:
Commodities reverse, coupled with
store investment result in lower
margins.
• Macro Risk: Starbucks comps fall
if consumer health weakens.
• Multiple highly susceptible to
contraction if growth slows.
Bull Case - $76 Base Case - $66 Bear Case - $46
28x ’17e EPS of $2.70 26x ’18e EPS of $2.50 20x ’17 EPS of $2.28
Field of Creams. Food attachment and MSR continue to
grow ,coupled with some pricing resulting in comps
recovering to high-single digits. Company scales back
investment in Americas, doubles its stores in Asia as
China copies the path of Japan, and channel
development goes international. Starbucks grows EBIT at
a mid teens rate and EPS at 20%+.
Grande Expectations. Starbucks comps recover to mid-
single digits. Investments still high, but Starbucks grows
in Asia resulting in EBIT margin expansion. Channel
development continues to grow EBIT at a double-digit
rate. Moving forward, revenues continue to grow in low
double digits, EBIT margin expands, and EPS grows in
the high teens.
Ordered a Venti, Got a Short. MSR and food attachment
flatten out and company exercises some pricing power.
Macro-factors negatively impact the company and
investment continues causing margins to delever. China
and Japan economies weigh on revenue growth and CAP
slows, EBIT margins flatten and EPS grows low-double
digits. Multiple contracts due to lower growth.
$58.14
$76
$66
$46
$30
$40
$50
$60
$70
$80
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Source: Company Data, Evercore ISI
April 4, 2017
56
Page 57
Evercore ISI
SBUX Comp Growth Outpacing Industry
9.0%
8.0%
7.0%7.0%7.0%
9.0%9.0%
8.0%
5.0%
6.0%6.0%
5.0%5.0%
7.0%
8.0%8.0%
9.0%
7.0%
4.0%
5.0%
3.0%
8.0%
7.0%
6.0%
7.0%
6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
FY
12
FY
13
FY
14
FY
15
FY
16
Transactions Ticket DNKN QSR Average
Since 2012, Starbucks has averaged comp growth of 7%. Additionally, SBUX has been
able to grow transactions at an average rate of nearly 4% over this period. Starbucks is not
a new concept, and to generate this type of transaction growth on this scale is impressive.
While comps have slowed recently due to difficult compares, a tough macro environment
and bottleneck problems from MO&P, , it has significantly outpaced DNKN (630bp comp
differential in FY15 and 540bps differential in FY16), as well as the industry. We believe
that the recent slowdown is more of an exception than the trend and believe Starbucks has
enough drivers to sustain mid-single digit comps.
We believe that Starbucks will revert to mid-single digit comp growth as we believe
beverage innovation, My Starbucks Rewards growth, food attachment, pricing and
improvement in the recent macro conditions. High teens MSR membership growth and
technology included suggested selling and personalization yield 100-200bps of comp
growth. Food attachment has decreased to 100bps of comp, but could accelerate as
SBUX launches new items especially during the afternoon hour, and based on current low
attachment on food items (~1/3 of orders). These factors coupled with SBUX pricing power
gives us confidence that mid single digit comp growth should persist.
Comp Model
100-200
100-200
150-250
0
100
200
300
400
500
600
MSR / Tech Food Core /Pricing
(BP
S)
While Starbucks Americas (largely U.S.) comp has slowed it has outpaced QSR and we believe SBUX
should continue to outpace the industry
Starbucks Americas Comps vs. the Industry
Source: Evercore ISI, Company Filings
MSR U.S. Members and Growth
7.3 8.1 8.1 8
9 10.3 10.4 10.2
11.1 12.0 12.3 12.0
12.9 13.8 14.1 13.8
0%
5%
10%
15%
20%
25%
30%
0
5
10
15
20
% G
row
th
U.S
. R
ew
ard
s M
em
bers
(M
illio
ns)
U.S. Rewards Members YoY Growth
April 4, 2017
57
Page 58
Evercore ISI
SBUX: Disproving the Bear Case
*2013 adjusted for 53rd week
Source: Company Data, Evercore ISI
Total Company Contribution Margin Total Company Contribution Margin has been solid since 2010.
Historical and Projected Restaurant Margin Americas Operating Margin has increased by more than 500bps since
2011.
Americas Contribution Margin The Americas segment has had significant profit flow-through despite
investments in labor and technology.
April 4, 2017
58
The key debate or pushback on owning SBUX equity is around how the
earnings algorithm changes if the comps remain structurally lower than
the mid-to-high single digit growth rates experienced over the last
several years. Some investors have remarked that despite strong recent
comps over the last few years, profit flow-through was weak, which could be
a bigger problem if comps slow. SBUX generated 30%+ contribution
margins in the Americas since 2011 and expanded Americas operating
margins by more than 500bps since 2010. We’d argue that the consistency
in the contribution margin is a good indication that SBUX has a strong grasp
on how it wants to manage its profit flow through. Unlike in the early 2000s,
when the overall business returns were declining, and the incremental return
began to decline given its heavy U.S. store exposure, the company is much
more diversified today with a booming Asia and Channel Development
business. Even if margins in the Americas fall, growth in SBUX other
segments should be sufficient to generate strong EPS growth.
Our take is that SBUX likely has more levers at its disposal than they
are given credit for, and 15-20% EPS growth remains a reasonable
earnings growth expectation.
-40%
-20%
0%
20%
40%
60%
80%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017e
2018e
2019e
2020e
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
0.15
0.2
0.25
0.3
0.35
0.4
2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
Page 59
Evercore ISI
SBUX CAP and Channel Development Opportunity
Source: Euromonitor, International Coffee Organization, Evercore ISI, Company Filings
* Adjusted for 53rd week.
Chinese Coffee Imports
0.2 0.3 0.3 0.4 0.4 0.5 0.5 0.6 0.6 0.6
1.01.3 1.3
1.5
1.92.2
2.6
3.1
3.7
4.3
0
1
2
3
4
5
Mil
lio
ns
of
10,0
00
kg
Ba
gs
668
1,843
333
239
179
(27)
3889
67
21047
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2016EBIT*
OwnedStores
IncreasedSales
LicensedRevenuesIncreased
Sales
CoGSLeverage
StoreOperating
CostsLeverage
Other OpCosts
Leverage
G&ALeverage
D&ALeverage
Incomefrom
EquityInvestees
Other 2021 EBIT
CAP EBIT Walk
Channel Development Revenues
$1,546$1,731
$1,933$2,054
$2,218$2,373
$2,537$2,712
2014 2015 2016 2017e 2018e 2019e 2020e 2021e
Channel Development EBIT and Margin
$557$654
$807
$933$1,005
$1,100$1,202
$1,315
36.0%37.8%
41.8%45.4% 45.3% 46.4% 47.4% 48.5%
0.0%
11.0%
22.0%
33.0%
44.0%
55.0%
$0
$400
$800
$1,200
$1,600
2014 2015 2016 2017e 2018e 2019e 2020e 2021e
EBIT EBIT Margin
China represents a significant growth opportunity for SBUX, and we believe it can double China store
count over the next five years. From 2016-2021, we project CAP revenues and EBIT CAGR of 15% and
22%, respectively. Channel development also has solid growth potential with 2016-2021e revenue and
EBIT CAGRs of 7% and 11%, respectively.
April 4, 2017
59
Page 60
Evercore ISI
$13.50
$22
$16
$10
$6
$9
$12
$15
$18
$21
$24
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Wendy’s (WEN), Outperform, Base Case $16
Investment Thesis
Tremendous inflection in FCF presents attractive payout: FCF trends from $31mn in ’16 to $160-185mn in ’17 to an estimated
$214mn by 2018 driven by factors within the company’s control – mostly reductions in G&A and CapEx as well as higher net rental
income and reduced deferred tax payments. On 2018 FCF, WEN currently trades above a 6.7% FCF yield, a 200bps premium to its
peers. Longer-term free cash flow target of $275mn will be more reliant on unit expansion (3% annually) and achieving comp growth
within the 2-3% targets.
QSR burger category is saturated and competitive: WEN has found success recently by highlighting food quality, and using LTOs
that promote core menu items. While this has resulted in traffic that is much better than its QSR Burger peers, this is a saturated and
competitive category where comps will likely be low-single digit and unit growth will be modest for the category over the long run. With
refranchising expected to be complete in 2016, Wendy’s needs buy-in from franchisees to reimage current restaurants and restart unit
growth.
Reimage / Remodel Program: Wendy’s has increased its reimaged goal is to 70% of units ‘reimaged’ and is targeting 500-550
domestic net new stores by 2020 demonstrating the willingness of franchisees to invest in the brand. ~32% of the WEN North
American store base is in these newer formats, with franchisees buying into these remodels despite relatively low paybacks. This
provides a signal that 2-3% domestic unit growth is attainable post 2020. The international growth target (nearly doubling units by
2020) is less certain.
Scenario Analysis – FCF and Comp Key Drivers of Stock Movement:
Catalysts
• Comp growth: High-low
strategy succeeds and comps
grow >3%
• Reimaging and Rebuilds:
Franchisees buy-in, 10%
reimages per year, >100 net
new stores added per year
• Continued FCF Inflection
• Potential monetization of
Arby’s
Risks
• Comps fall flat: Intense
competition causes comps to
decelerate to negative
• Franchisees don’t buy in:
Reimages could lag 10%
targets, and store counts
could continue to decline
• Wage inflation: Reduces
store margins and franchisee
demand for new stores
Bull Case - $22 Base Case - $16 Bear Case - $10
23x ‘18 FCF/Share of $0.96 (4.3% FCF Yield) 17x ‘18 FCF/Share of $0.92 (5.9% FCF Yield) 12.5x ‘18 FCF/Share of $0.80 (8% FCF Yield)
It’s Better Here. Comps recover and accelerate to
>3%. Franchisees continue to buy into reimages, and
unit count growth also accelerates to greater than 3%.
AUVs outpace comps, and investors get more
confidence in WEN’s 2020 FCF target of $275mn. The
company releverages its capital structure, and WEN
receives a FCF yield comparable to its peers.
Wait Just a Little Longer. Wendy’s balanced
marketing message helps comps recover to 2%+ and
restaurant margins hold steady. Franchisees continue
to reimage restaurants at the current rate and unit
count grows LSD. Visibility to 15%+ FCF growth after
2017 causes investors focus on 2018 but still give
WEN a higher FCF yield due to leverage and lower
unit growth.
Where’s the Beef? Competition intensifies, 4 for $4
loses its luster, and comps stay flat. Franchisees are
slow to reimage and the company has to drop royalty
rates further to gain buy-in. Franchisees are also
hesitant to grow units due to flat comp and labor
inflation. 2018 FCF falls short of $200mn resulting in a
high single digit free cash flow yield.
Source: Company Data, Evercore ISI
April 4, 2017
60
Page 61
Evercore ISI
382
514
50
40 25
(46)
63
2016 Adj.EBITDA*
Franch Fees- Unit
Growth
Franch Fees- Comp /
Other
Net RentalIncome
LowerRestaurant
Profits
Lower G&A 2020e Adj.EBITDA
WEN – EBITDA Growth
Adjusted EBITDA Bridge Adj. EBITDA expected to grow at an 8% CAGR from 2016-2020.
We expect EBITDA to CAGR at 8% through 2020, two-thirds driven by
G&A and rental income – which are largely under Wendy’s
controllable. Wendy’s affirmed EBITDA margin guidance of 38-40% by
2020, and we expect EBITDA margins of 38.4% by 2020, at the lower end
due to lower than expected unit growth and flat RLMs. G&A reductions
represent the largest factor in this EBITDA growth as WEN guided to 1.5%
of system sales by 2020, or $180mn - we believe this target is somewhat
aggressive as concepts like YUM, DNKN and DPZ have higher G&A
targets as a % of system sales, and also have higher franchised
percentages. We expect rental income to increase by $25mn, $22mn of
which occurs in 2017. The remaining portion of the EBITDA increase is
from unit growth, comp and restaurant margins. WEN is targeting 2-3%
comp growth, and we believe this is an achievable target, even if it may be
slightly higher than the QSR average, due to WEN’s balanced marketing
message between core and value and a continued benefit from reimages.
2016 was also the first year when WEN increased unit count, and expects
to add 1,000 net new units by 2020, representing a 3.6% CAGR. We
expect the company to meet the low end of its 500-550 domestic target,
but be short of its international target, as this represents a show-me story.
We also, expect restaurant margins to remain relatively flat at ~19% as
labor inflation offsets productivity improvements and comp.
*2016 Adj EBITDA excludes ~$10mn of lease buyout gains.
Source: Company Data, Evercore ISI
General and Administrative Expenses WEN is targeting a somewhat aggressive G&A target of 1.5% of system
sales implying a $65mn decline from 2016 levels.
2016-2020 Unit Growth The company is targeting 1,000 net new units (500-550 domestic). We
expect closer to 800 units resulting in a 3% CAGR.
April 4, 2017
61
500-550
411
1,000
2.2%
3.6%
500
311
811
2.1% 3.0%
500
Domestic Net InternationalNet
Total DomesticCAGR
Total CAGR
Target EVR ISI Prior Target
$261 $257 $246$216 $195 $189 $183 $180
2.7%2.6%
2.5%
2.1%
1.8%1.7%
1.5% 1.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
$0
$100
$200
$300
$400
2014 2015 2016 2017e 2018e 2019e 2020e MgmtTarget
G&A Expense % of System Sales
Page 62
Evercore ISI
$224
$298
$252
$150
$85 $80 $75 $65
$106
-$34
$10$34
$161
$216$238
$271
2013 2014 2015 2016 2017e 2018e 2019e 2020e
CapEx FCF
WEN Free Cash Flow Growth
2020 Free Cash Flow Sensitivity While 2020 FCF algorithm is more sensitive to comp than 2018 targets, comp
would have to meaningfully miss targets for FCF to fall below $200mn.
Source: Company Data, Evercore ISI
Free Cash Flow and CapEx FCF has been depressed due to near-term capex. FCF is expected to inflect
in 2017, largely due to a decline in capex, and we expect a CAGR of 16%,
resulting in FCF of $271mn, falling just short of WEN’s target of $275mn.
WEN’s new 2020 FCF target of $275 is ~9x current levels and is
driven largely by controllable factors. WEN pushed out its FCF guide
from $200-$250mn in 2018 to $275mn in 2020. While bears may view
this as evidence that the company is walking away from their 2018 FCF
target, we view this as being consistent with WEN’s new guidance
structure of guiding near-term (guided to 2017 FCF of $160-185mn, vs.
$150-$200 previously) and long-term (the 2020 guide), but not everything
in between. Most of the FCF inflection remains driven by a decline in
capex (guided to $65mn by 2020), reversal of working capital drag (mostly
due to the sale of restaurants), and deferred tax payments. And of the
$132mn increase in EBITDA, two-thirds of that increase is driven by
reduced G&A and increased rental income.
Comp growth will impact the ability to generate higher FCF over the
long-run, but doesn’t materially alter the FCF inflection in ’17 due to
WEN’s highly franchised system. While the QSR burger category is
very competitive, we think WEN is running the right strategy to drive
comp. 1pt of comp growth in 2017-2020 is worth ~$35 million of EBITDA
and $22 million of FCF in ’20, so the comp would need to be meaningfully
divergent from our 2.5% comp estimate to bring FCF below previously
guided 2018 levels.
April 4, 2017
62
$465$500
$535$570
$605
$238 $260 $282 $304 $326
1.0% 2.0% 3.0% 4.0% 5.0%
2017-2020 Comp Growth
2020e EBITDA 2020e FCF
2016-2020 Free Cash Bridge Much of the FCF expansion comes from capex decline, G&A
reduction, elimination of deferred tax payments and working capital.
31
271
30
30
132
85 18
(19)
2016 CashFlow
Plus NWCChange
2016Deferred
TaxPayment
EBITDAGrowth
CapexDecline
CashInterestIncrease
CashTaxes /Other
2020 EVRISI FCF
Page 63
Evercore ISI
DPZ
QSR
SBUX
DNKN
PNRA
MCD
WEN
PZZA
SONCJACK
YUM
14x
18x
22x
26x
30x
34x
38x
7% 15% 23% 31%
NT
M P
E
Future Total Shareholder Return*
WEN Valuation
* Calculated as 2018 projected free cash flow (cash flows from operations less capex) per share divided by the current share price.
Source: Company Data, Evercore ISI, FactSet
2018 Free Cash Flow Yield* Despite the run in the share price, WEN still offers investors one of the
highest FCF yield per share of its peers.
6.7% 6.7%
5.1% 5.1%4.9% 4.7% 4.7% 4.6%
3.2%2.8%
SONC WEN QSR DNKN YUM JACK MCD PZZA DPZ PNRA
2017 PE vs. Future Total Shareholder Return WEN is undervalued vs. peers based on future earnings potential
Market Stock Movement EV/EBITDA PE
FCF
Yield
Div
Yield 2016-2020 Growth CAGR
2016-
2020
Total
Debt/
Name Ticker Price Rating Cap EV 30D YTD 2017e 2018e 2017E 2018e 2017e 2016 Units Sales EPS TSR EBITDA
Chipotle Mexican Grill CMG 452.75$ In-Line $12,986 $12,340 8.8% 20.0% 23.0x 18.9x 56.6x 42.4x 2.3% 0.0% 8.6% 12.9% 93.1% 93.1% 0.0x
Dunkin Brands Group DNKN 54.58$ Underperform $5,025 $7,091 -0.4% 4.1% 15.0x 14.1x 22.9x 20.6x 5.4% 2.4% 2.7% 2.9% 9.0% 11.3% 5.4x
Domino's Pizza DPZ 186.23$ In-Line $8,946 $10,964 -1.5% 16.9% 19.7x 17.4x 35.9x 29.4x 2.8% 1.0% 7.0% 9.3% 19.5% 20.5% 4.4x
Jack in the Box JACK 101.89$ In-Line $3,224 $4,259 6.7% -8.7% 11.8x 11.0x 23.0x 18.9x 5.1% 1.6% 4.0% -0.1% 17.1% 18.7% 3.1x
McDonalds MCD 129.61$ In-Line $106,150 $130,882 1.3% 6.5% 13.8x 13.6x 21.3x 19.8x 4.3% 2.9% 2.2% -6.6% 8.6% 11.5% 2.8x
Panera Bread Co PNRA 282.63$ In-Line $6,422 $6,669 23.4% 37.8% 15.1x 13.6x 37.0x 31.4x 1.8% 0.0% 3.5% 7.2% 15.0% 15.0% 1.0x
Starbucks SBUX 58.44$ Outperform $85,170 $85,338 2.3% 5.3% 15.1x 13.2x 27.5x 23.4x 3.3% 1.7% 8.3% 9.8% 16.0% 17.7% 0.6x
Wendy's WEN 13.56$ Outperform $3,348 $5,662 0.0% 0.3% 14.1x 12.8x 29.3x 21.2x 5.2% 2.1% 3.0% -1.9% 26.8% 28.8% 6.6x
YUM Brands YUM 63.55$ Outperform $22,487 $30,187 -2.3% 0.3% 15.5x 15.0x 23.9x 20.5x 4.4% 2.0% 3.5% -9.0% 15.2% 17.2% 4.7x
YUM China YUMC 27.20$ In-Line $10,453 $10,003 2.6% NA 8.4x 7.9x 18.8x 16.7x 5.2% 0.0% 5.9% 5.8% 12.5% 12.5% 0.0x
Quick Service Mean 4.3% 9.2% 15.9x 14.4x 30.8x 25.3x 3.8% 1.5% 4.7% 2.7% 24.5% 26.0% 3.2x
Quick Service Median 1.3% 5.3% 15.1x 13.6x 27.5x 21.2x 4.3% 1.7% 3.5% 2.9% 16.0% 17.7% 3.1x
Coverage Universe
April 4, 2017
63
Page 64
Evercore ISI
$63.64
$90
$75
$58
$40
$50
$60
$70
$80
$90
$100
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
YUM! Brands (YUM), Outperform, Base Case $75
Investment Thesis
• Post 2018, YUM will be an asset-light company with cash flows diversified by brand and geography with a long runway for
growth. At 98% franchised, YUM will have low earnings volatility and low capital intensity with 60% of restaurants located outside of
the U.S. System-sales goal of 7% annual growth might be a stretch, but unit growth has a long duration with the opportunity to grow
2-3x the current footprint.
• Clear visibility on EPS growth with most accretion driven by items within YUM’s control. Refranchising will drop the G&A by
$300mn, reduce to capex to $100mn or 5% of EBITDA, which will result in 100% NI to FCF conversion. This cash conversion and
buybacks provide the majority of earnings growth to reach its $3.75 EPS target in 2019, or 15% EPS annual growth from 2016 pro
forma EPS.
• KFC and Taco Bell two strong global brands – Pizza Hut not so much: KFC should generate 3-4% unit growth and 7% operating
profit growth. It is a concept that exports well, and comps have been positive since the recession. Taco Bell focuses on value and
innovation; longer run growth in the brand outside of the U.S. might take time to build awareness. Pizza Hut is the largest global
pizza chain, but is experiencing a multi-year turn-around in the US and global growth.
• Current year valuation at 15.5x EBITDA seems full, but high teens annualized returns are a justifiable reward given the
visibility on this path to 2019.
Catalysts • G&A and CapEx cuts materialize:
While the cuts are significant,
company disclosure on type and timing
was not. If reductions come sooner
than later, investors will have more
confidence in earnings targets
Pizza Hut Recovers: If Pizza Hut is
able to execute on its turnaround plan,
it can stop losing share and join the
mom and pop share taking party.
Taco Bell Int’l Growth Story: Int’l
units accelerate and performance is
strong giving YUM a third global brand.
Risks
• Pizza Hut Inflects Downward: A
further weakening would likely cause
growth to stop and potentially
increased closures.
• Commodities Reverse: Multiple YUM
concepts are depending on deflation to
offset wage increases.
• FX: Majority of YUM’s units are
international, a strong dollar would
cause revenues and profits to decline
Bull Case - $90 Base Case - $75 Bear Case - $58
20x YUM ’17 EBITDA of $2.1Bn 18x YUM ’17 EBITDA ($1.95Bn), 16x YUM ’17 EBITDA ($1.85Bn),
Yo Quiero YUM. System unit growth and comps result
in high single digit system growth. KFC accelerates its
growth story. Pizza Hut takes share from mom and
pops and grows low single digits, while Taco Bell
executes on mid-single digit comps and accelerates
int’l growth. G&A and capex cuts materialize earlier
than expected.
Finger-Lickin Good. The company achieves its
system unit growth targets by 2018. KFC grows
system revenues at 5-6%, Pizza Hut grows profits
low single digits due to some unit expansion, and
Taco Bell comp continues at 2-3%, while units
expand, but international is slow to catch on. G&A
and capex reductions are more back-weighted into
2017 and 2018.
South of the Border Performance. KFC comp
decelerates, Pizza Hut continues to lose share. Taco
Bell comps slow to industry levels of 1-2%. Pizza Hut
continues to comp negative and the company has to
close stores. Commodities increase causing
margins to further compress. Dollar continues to
strengthen and net new unit growth slows.
Source: Company Data, Evercore ISI
April 4, 2017
64
Page 65
Evercore ISI
YUM! Brands Snapshot
Source: Technomic, Company Data, Evercore ISI
April 4, 2017
65
Brand Strength Strong Strong Weak
Global Growth Oppty. High Low Medium
System Sales $23B $10B $13B
Units - U.S. / Non U.S. 4,160 / 17,140 = 21,300
20% / 80%
6,500 / 325 = 6,825
~95% / 5%
7,700 / 9,200 = 16,900
~46% / 54%
2016-2020 Unit CAGR 3.5% 4.3% 3.3%
Units Added Annually ~700 ~300 ~570
2017e Comp Growth 2.5% 3.0% 1%
% Franchise* 93% 86% 96%
Key Points Strong global brand: Chicken as an
ingredient has ubiquity globally.
Brand translates well around the
world.
Largest Store Growth Opportunity.:
Could grow units 2-3x, leaving
decades of growth. Nearly all of
growth is outside U.S.
New focus on value and marketing:
Brand has be strong with focus on
value (bundled offers) and better
marketing has moved to comps back
to positive.
Very strong U.S. concept: Accounts
for nearly half of the U.S. Mexican
QSR segment.
Mostly a U.S. Concept: Mexican
fare has not exported well historically.
Beginning to do more, but category
would need to develop globally for a
large unit count opportunity. Likely
8,500 U.S. units over time.
Very Innovation and Value Driven
Brand: Customers react to new
products and value. Low average
check of $5.35 drives very high
frequency.
Lagging Concept, But Improving
Recently: #1 global pizza chain.
U.S. underperformed for years and
continuing to lose share. China has
big issues, most other stores are in
EM.
Mature U.S. category, global unit
grower: Limited U.S. unit growth
opportunity, global category is
underdeveloped and likely under-
stored
Turnaround Opportunity: Lags
significantly behind large peers in the
U.S. and globally, but YUM has been
successful in turning around Taco
Bell and Pizza Hut in the past.
Page 66
Evercore ISI
$2.45
$3.72 $3.75
$4.32
$0.43
$0.34
($0.49)
$0.99
YUM Earnings Algorithm
2016PF-2019e EPS Bridge We believe that YUM will be short of its $3.75 EPS target (due in part to
recent FX moves) but most of the levers (G&A, Capex, Buybacks) are
within the company’s control.
6,081
1,953 2,370
2,175
1,240
$1,087 $1,199
$0
$900
$1,800
$2,700
$3,600
$4,500
$5,400
$6,300
2016PF 2017e 2018e 2019e 2020e
Dividends Buybacks FCF
Shareholder Returns The company’s targeted $6.5-$7.0 billion of shareholder returns from
2017-2019 represent ~30% of current market cap.
Historical and Projected G&A Expense YUM is targeting $300 million of G&A targets from 2015 pro forma levels
resulting in near-industry low levels of 1.5% of system sales.
April 4, 2017
66
1,035 963 855 799 800
2.2%
2.0%
1.7%
1.5%
1.7%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0
500
1,000
1,500
2,000
2016 2017e 2018e 2019e 2019Target
G&A % of System Sales
Post-2019 TSR Mid single digit system sales growth results in high single digit EBIT growth
and low double digit net income growth (leverage). Buybacks result in MSD
EPS growth with dividends boosting TSR to mid-to-high-teens.
6%
8%
10%
15%
17%
2%
2%
5%
2%
SystemSales
Growth
OperatingLeverage
EBITGrowth
FinancialLeverage
NetIncomeGrowth
Buybacks EPSGrowth
Dividend TSR
Source: Company Data, Evercore ISI
Page 67
Evercore ISI
SONC
PZZAWEN
MCD
DPZ
DNKN
QSR
YUM 2019
15%
20%
25%
30%
35%
40%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Ta
x R
ate
CapEx / EBITDA
YUM Valuation Post 2019
PE Ratio vs. System Sales Growth A 24x PE multiple appears conservative given YUM’s 6% system sales
growth (which is lower than YUM long-term System Sales Growth)
Shareholder Returns However, this premium multiple is justified given YUM’s lower tax rate
and capital intensity.
EV/EBITDA Comparison YUM’s 2019 EV/EBITDA comparison is higher than current peer multiples.
April 4, 2017
67
PE Ratio vs. Total Shareholder Return* A 24x PE ratio also appears to be conservative given YUM’s projected mid-
to-high teens total shareholder return which we believe is higher quality than
most peers given its future 98% franchise percentage.
19.7x
17.8x16.8x
15.5x 15.5x 15.0x14.1x 13.8x
11.2x
DPZ QSR YUM2019
YUM PZZA DNKN WEN MCD SONC
SONC
PZZAWEN
MCD
DPZ
DNKN
QSR
YUM 2019
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
2% 4% 6% 8% 10% 12% 14%
2017 N
TM
PE
2018 System Sales Growth
SONC
PZZAWEN
MCD
DPZ
DNKN
QSR
YUM 2019
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
10% 15% 20% 25% 30%
2017 N
TM
PE
2018 Total Shareholder Return*
Source: Company Data, FactSet, Consensus Metrix, Evercore ISI
*Defined as EPS growth plus dividend yield
A 24x 2019 PE ratio results in a $90 share price, or a $75 share price today resulting in a 19% annualized return
Page 68
Evercore ISI
Defining the YUM Bear Case
2019 EPS Sensitivity on FX. 2019 EPS Sensitivity on 2017-2019 Comp Growth
April 4, 2017
68
We believe there is not much downside to YUM with comp and FX being the primary items out of the
company’s control, and these items are not likely to have a substantial impact on EPS.
$3.13 $3.37
$3.61 $3.86
$4.11 $4.37
0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
2017-2019 Comp Growth
$4.15 $4.06
$3.98 $3.89
$3.80 $3.72
$3.64 $3.55
$3.46 $3.38
$3.29
-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10%
2018 U.S. Dollar Move
The majority of EPS growth is due to factors within the company’s control that include G&A reduction, D&A reduction due to the migration to a 98%
franchised system and buybacks
We believe the unit growth targets have low risk as both KFC and Pizza Hut have a lot of white space internationally and Taco Bell has multiple years of
runway in the U.S.
We estimate that 1pt of comp in 2017-2019 impacts EPS by ~$0.25 or 7%. However, this risk is mitigated by (1) being concept diversified – there is low
risk that all concepts experience a slowdown at the same time, (2) being geographically diversified – lower risk that all geographies experience a
slowdown at the same time (3) conservatism in targets – we expect a 2.5% comp target for KFC (vs. 3% currently), 3% comp for Taco Bell (3%
currently) and 1-2% for Pizza Hut (-1% currently).
We estimate that a 2% move in the dollar impacts FX by $0.08. The dollar has strengthened considerably since 2014 with most of that occurring in
2015. While the dollar reached highs post-election, this still only results in a 3% move on a trade-weighted basis. We are not currency speculators, but
a similar future move to 2015 would result in a Euro/USD exchange rate below $0.90 to 1 Euro.
Overall a 1% (vs. 2.5% in the base case) comp coupled with a 3% strengthening in the dollar (from current levels) would result in an expected
2019 EPS of ~$3.25. Assuming a 20x multiple results in a 2018 year-end share price of $65, or approximately equal to today.
Source: Company Data, Evercore ISI
Page 69
Evercore ISI
YUM! China (YUMC), In-Line, Base Case $30
Investment Thesis
• China business a growth opportunity with many risks: A volatile business based on exogenous factors generally
out of YUM’s control. In an ideal state, YUM China has exposure to a developing and fragmented industry with an
emerging and increasingly wealthy consumer base. In reality, the market is evolving quickly, and not always to YUM’s
benefit. The greatest threat is the rise of online delivery aggregators, which somewhat levels the playing field between
YUMC (more of a threat to PHCD than KFC) and smaller independent chains.
• Unit growth opportunity large, restaurant margin likely has upside: YUMC believes the unit growth opportunity is
~3X its current 7.5k units in China, but growth rates are impaired by store closures. Transition to VAT system versus the
prior business tax should help margins by at least 2 points, but low comp growth may pressure margins over the long-run
if costs inflate faster than sales.
• Earnings algorithm: We expect 5% unit growth and LSD comps to translate into low-DD operating profit growth and
mid-teen EPS growth. We expect 40%+ of EBITDA to fund Capex, with buybacks requiring repatriation at the U.S.
Federal Rate
Scenario Analysis – Growth Likely, but not for the Faint at Heart
Catalysts • Management and Investor Focus:
Spin enables both management and
investors to focus on this pure-play
Chinese consumer business.
• Average Unit Volume (AUV)
recovery or decline: AUVs have
declined from competition, with future
growth largely coming from lower-tier
cities that may have lower volumes.
• Restaurant Level Margins (RLM):
Change from business tax to VAT a
structural notch up in rate. Material
labor and cost inflation could be long-
run drag on RLM.
Risks
• Frequency of exogenous events:
YUMC has had issues with bird flu,
suppliers, O2O networks, stock market
swings, and anti-Western protests.
• Commodities Reverse: Food
deflation reversal
• FX: 100% of revenue is in Yuan, with
U.S. repatriation required for buybacks
and potential dividends.
Bull Case - $40 Base Case - $30 Bear Case - $21
11x YUMC ’17 EBITDA of $1.35Bn 9x YUMC ’17 EBITDA of $1.2Bn 7x YUMC ’17 EBITDA of $1.0Bn
The Year of the Rooster: Comps stabilize and KFC
comps mid-single digits, units accelerate while RLMs
pace to reach 20% on scale and the VAT change. PHCD
accelerates unit count and regains momentum causing
comps to recover to mid-single digits as customers
gravitate back to the brand after positioning around value.
Company RLMs expand to high teens while EBITDA
grows at low-double digits while EPS CAGRs at high-
teens to low 20s. Multiple expands due to stability.
Poultry In Motion: Comps continue to display volatility
but averages out to KFC at ~3% and PHCD at 1%. KFC
unit growth increases to 5% and margins increase to
around 17% in 2017, but are flat thereafter as wage
inflation offsets comp and fixed costs. PHCD margins
delever after 2017 due to wage inflation resulting in mid-
teens RLMs overall. Due to topline and G&A leverage,
EBITDA CAGRs at 9% and EPS CAGRs at 14-15%, but
multiple remains at ~9x on volatility fears.
Battered & Boneless: Another event occurs (whether
it be macro or company-specific), and both KFC and
PHCD comp negative. This causes RLMs to recede
back to pre-VAT 2015 levels equating to company-level
restaurant margins of ~13%. Closures decrease net
growth, and lackluster comps cause incremental margin
degradation moving forward. EBITDA grows low single
digits and EPS grows mid-single digits.
Source: Company Data, Evercore ISI
April 4, 2017
69
$26.60
$40
$30
$21$20
$25
$30
$35
$40
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17
Page 70
Evercore ISI
YUM! China Brands Snapshot
Source: Company Data, Evercore ISI
April 4, 2017
70
Yum China Concepts KFC Pizza Hut Casual Dining All Other Segments
Pizza Hut Home Service, Little Sheep,
East Dawning (Taco Bell – Future)
Brand Strength Strong Medium Weak
Units / % of Yum China ~5,100 / 68% 1,600+ / 23% ~350+ Pizza Hut Home Service
~235 Little Sheep
~15 East Dawning
Cities / Provinces 1,114 / 30 427 / 30 NA
Est. System Sales / % of
Yum China ~$6.5Bn / 75% ~$1.9Bn / 21% ~$300mn / 4%
2017 Net Units Added /
Growth Rate 280 / 5.4% ~140 / 8.2% ~50 / 8%
2017e Comp Growth** 3.0% 1% NA
2017e AUVs $1,200 $1,100 NA
2017e Restaurant Margin 17.3% 14.1% 10.2%
2017e Operating Profit / % of
Yum China* $748mn / 81% $176mn / 19% ($20)mn
% Owned ~76% 98% ~90%
Key Points: Largest China Concept: KFC is the largest
chained restaurant in China with 2x the units
of its next closest competitor.
Single Digit Unit Growth: We project 5%
unit growth due to the size of the concept.
Tailwinds include urban population growth,
transportation hubs and shopping malls.
Choppy Performance: After three years of
negative comp sales, comps are expected to
be positive but have been volatile.
Largest Casual Dining Concept: Pizza Hut
is mostly a premium casual dining restaurant
in China
Performance has been negative but has
recently improved: Pizza Hut comps have
declined in 10 straight quarters due to
economic softness and increased competition
especially from online aggregators. However,
SSS has improved from double digit negative
to low single digit negative
Pizza Hut Home Service has
potential: Pure pickup and delivery
concept similar to pizza chains in the
states. While small, has doubled unit
count over the past few years.
(Recently rolled into Pizza Hut).
Other concepts have minimal growth
potential and likely will not have
significant impact on YUM financials
moving forward. Have mentioned
Taco Bell potential but way too early
to impact financials.
Page 71
Evercore ISI
Independent, 98.5%
Chain, 1.5%
YUM China Market Outlook and Current State
YUM China System Wide Sales After slowing to low single digits (MSD ex FX), we expect high single digit
system sales growth moving forward.
YUM China Unit Counts and Growth Rate New unit count slowed in 2016, and we expect a slight acceleration to
450-500 net new units (6% growth) per year.
China Restaurant Industry Structure – Independent
vs. Chain The restaurant structure is dominated by small independent restaurants and
is extremely fragmented.
April 4, 2017
71
Discretionary Spending per Capita (Urban) Discretionary spending per capita has increased at a 10% CAGR over the
past 15 years and similar growth is expected in the near future.
Source: CEIC, Chinese Gov’t Data, Euromonitor, Company Data, Evercore ISI
¥0
¥5,000
¥10,000
¥15,000
¥20,000
¥25,000
¥30,000
¥35,000
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
20
11
20
14
20
17
20
20
4563 4828 5003 5224 5527 5827 6137 6457
6,2436,715
7,1767,562
8,0738,563
9,0639,573
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
2000
4000
6000
8000
10000
12000
2013 2014 2015 2016 2017e 2018e 2019e 2020e
KFC Pizza Hut Casual Dining Other % Growth
$8,145 $8,270 $8,237 $8,213$8,728
$9,504
$10,314
$11,183
-5%
0%
5%
10%
15%
20%
25%
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
2013 2014 2015 2016 2017e 2018e 2019e 2020e
System Sales YoY Growth
Page 72
Evercore ISI
18%
10%
5%7%
-2%
7%5% 4%
8%
0%
-11%-9%
-6%-4%
-1%
-8%
-12% -11%
-4% -3%
0% 1%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2017e 2018e
Comp Growth Two-Year Stack
13%9%
0%
-8%
-24% -26%
-14%
-4%
11%
21%
-14%-18%
-14% -12%
3%6%
12%
3%
-1%
1% 2% 3%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2017e 2018e
Comp Growth Two-Year Stack
YUM China Comp Volatility
PHCD Historical and Projected Comp Growth
April 4, 2017
72
KFC Historical and Projected Comp Growth
Source: Company Data, Evercore ISI
YUM China’s comp growth has been exceptionally volatile over the past four years due to a multitude of
company-specific and macroeconomic issues. While we do not expect the same level of volatility moving
forward, we believe that a high level of volatility is to be expected in an emerging market growth story.
However, YUMC is currently facing significant online competition and has recently underperformed peers.
Page 73
Evercore ISI
$398 $428$564
$660 $728 $797
$985
$1,112$1,203
$1,302
$1,414
$1,525
2015 2016 2017e 2018e 2019e 2020e
FCF Adj EBITDA
YUM China Growing Pains and Profit Conversion
EBITDA and FCF Conversion We expect current FCF conversion rates of ~35% to expand as YUM
capex remains flat and EBITDA expands.
2017-2020 YUM China Earnings Algorithm Mid-double digit EPS growth driven by high-single/low-double digit
operating profit growth and buybacks.
YUM China PF Restaurant Margins* RLMs have recently recovered due to the VAT, but we believe that YUM
China will fall short of its 17% RLM goal
April 4, 2017
73
Historical and Projected AUVs AUVS appear to have stabilized after declining by ~29% since 2012,we
project 2016-2020 AUV CAGR of 2.1%.
* Inclusive of 3% royalty fee.
Source: Company Data, Evercore ISI
$1,248
$1,581$1,619
$1,365
$1,272
$1,199
$1,115$1,098$1,112$1,127$1,143
2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
19.1%
16.5%
14.9%
12.3%
11.6%
12.6%
15.3%
16.0% 15.9% 15.7% 15.7%
17.0%
2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
RLM Target:
6.9%
8.7% 8.8%
14.5%
1.8%(0.0%)
5.7%
Sales MarginExpansion
OperatingProfit
Higher TaxRate
Net Income Buybacks EPS CAGR
EBITDA 2015-2020 CAGR: 9%
FCF 2015-2020 CAGR: 15%
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ANALYST CERTIFICATION
The analysts, Matt McGinley and Josh Schwartz, primarily responsible for the preparation of this research report attest to the following: (1) that the views
and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research
analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.
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