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US Restaurants Phone To Table: Digitizing Restaurants Initiation of Coverage
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY
DISCLOSURE AND THE STATUS OF NON-U.S ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, 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.
25 June 2019
Research Analyst
Lauren Silberman, CFA, CPA
+1 212 325 2720 [email protected]
Equity Research US
2
Table of Contents
Executive Summary
US Restaurants Industry Overview
Company Summaries
Key Themes
Disclosures
Delivery Digital
M&A
Unit Growth
4
16
34
141
112
3
Accompanying Company-Specific Reports
Source: Credit Suisse estimates
CMG: Guac is Worth the Extra Charge and So Is Growth; Initiate Outperform
DNKN: Shares Hot on Luke Warm Outlook; Initiate Underperform
DPZ: Time to Get A Piece of This Pie; Initiate Outperform
JACK: Waiting for JACK to Come Out of the Box; Initiate Underperform
MCD: Hamburglar Positioned to Steal Share; Initiate Outperform
PZZA: Not An Easy Layup; Initiate Neutral
QSR: Maintains Claim To Throne; Initiate Outperform
SBUX: A Gold Star in Restaurants; Initiate Outperform
SHAK: Premium Burger Deserves Premium Multiple; Initiate Outperform
WEN: Can’t Find Catalysts As Fresh As The Beef; Initiate Neutral
YUM: Can’t Find Más Upside; Initiate at Neutral
4
Executive Summary
5
Coverage & Ratings 6 Outperform, 2 Underperform, 3 Neutral
Source: Company data, FactSet, Credit Suisse estimates
Ticker Company CS RatingMarket Cap
($MM)
Current
Price
CS Target
Price
Upside/
Downside
NTM
EV/EBITDANTM P/E CS Thesis
CMG Chipotle Outperform $20,302 $727 $870 19.7% 25.6x 53.0xHigh convinction in 10%+ top-line growth generating margin leverage with attractive flow-
through. Earnings growth supports premium multiple.
SHAK Shake Shack Outperform $2,531 $67 $77 15.4% 28.2x 113.8xUnique concept with unit growth potential of 20%+. Upside exists from better-than-
expected top-line & margins. Traffic & SSS stabilization should improve sentiment.
DPZ Domino's Pizza Outperform $11,606 $280 $320 15.1% 20.4x 29.0x
High convinction in ~10% top-line growth supporting global market share gains. Third-
party delivery concerns appear overblown. SSS outperformance should improve
sentiment & upside to base case.
MCD McDonald's Outperform $156,155 $204 $230 14.9% 18.0x 24.8x
We're bullish on MCD's outlook, with traction against sales initiatives supporting upside
to SSS and EPS near & long-term. Healthy global SSS, defensive characteristics,
ongoing transition to ~95% franchise-mix & increased digital focus should provide
support for the current valuation premium.
QSRRestaurant
Brands Intl. Outperform $32,685 $70 $78 14.3% 17.5x 25.5x
Confident in long-term growth with international network of master franchisees. Menu
innovation at BK US and innovation/digital enhancements at TH Canada should support
SSS acceleration. Valuation is reasonable relative to the peer group.
SBUX Starbucks Outperform $100,433 $84 $92 11.5% 17.4x 29.0x
High-single-digit rev growth, modest margin expansion & repurchases support EPS
growth of 10%+ going forward. Americas & CAP sales leverage, improved performance
in China & strategic optionality represent upside. A more focused growth strategy &
enhanced capital structure support the premium valuation to history.
WEN Wendy's Neutral $4,480 $19 $20 5.3% 15.0x 30.3x
Improved fundamentals and a more consistent FCF profile appear to be reflected in
shares. We're cautious on a meaningful acceleration in unit growth given recent
challenges & lack of international infrastructure, and risks to long-term targets could
weigh on valuation.
PZZA Papa John's Neutral $1,557 $44 $45 3.4% 15.7x 36.8x
Brand is still in recovery mode and implementation of strategic plan is in the works. While
we believe there is risk to numbers and elevated valuation, activist involvement, high
short interest, potential value unlock & potential M&A keep us Neutral.
YUM Yum! Brands Neutral $33,263 $110 $106 -2.3% 20.1x 28.3x
Solid asset-light business with a strong unit growth outlook and diversified portfolio
across brands and geographies. But at ~21x EV/EBITDA, valuation is rich and we would
wait for a better entry point before becoming constructive on shares.
DNKN Dunkin' Brands Underperform $6,617 $80 $70 -10.1% 18.3x 26.4x
We like the stability of the business model, experienced mgmt team & recent initiatives.
But at ~18x EV/EBITDA, DNKN is trading at a significant premium to its history & peers,
and we see downside risk from lower growth prospects & an elevated multiple.
JACK Jack in the Box Underperform $2,229 $85 $75 -10.1% 12.1x 19.1x
Flat SSS, elevated closures, geographic concentration, margin pressure & penetrated
burger segment represent headwinds to unit growth (flat over last decade). A lackluster
sales plan is unlikely to drive a sustainable SSS inflection. Risk to LT targets exist and
could weigh on valuation.
US Restaurants Coverage
6
Initiating Coverage of the Restaurants Sector Value Creation
Source: Credit Suisse estimates
Leverage the box (increase in-store sales)
– New product innovation, marketing/advertising, improved operations, effective
value messaging, etc.
Expand global footprint
– Grow units domestically and internationally
– Work with franchisees and licensed partners
Improve margins
– Top-line drives scale and efficiencies
– Cost savings
7
Initiating Coverage of the Restaurants Sector Evolution of Digital and Delivery
Source: Credit Suisse estimates
Leverage the box (increase in-store sales) – Demand for convenience
– Unlock incremental sales through digital channels (mobile order & pay, delivery,
loyalty incentives); increase throughput
Expand global footprint – Increase real estate site potential
– New formats increase addressable market
– Increase number of access points
Improve margins – Generate leverage and cost saves
– Increased capacity/throughput supports margin leverage (not constrained to
three meals)
– Cost savings (i.e. labor)
– But digital also comes at a cost (i.e. infrastructure, delivery fees)
Volume Increases ~10-15%
Volume
Increases ~20-30%
Delivery
8
Digital Supports Incremental Sales Volumes Adding Convenience Not Seen Since the Drive-Thru
Source: Credit Suisse estimates
AUV*
Traditional
QSR
Drive-Thru
~50-70%
Sales Mix
Mobile Order
Drive-Thru
~20%
Sales Mix
Drive-thru orders tend to generate higher avg tickets relative to in-store orders (multiple people in car)
Digital channels support an additional layer of sales and orders generally 1.5-2x higher than an in-store order (group orders; suggestive sell; more time to browse)
*Average unit volume
9
Technology Comes At A Cost Corporate Level
Source: Company data, Credit Suisse estimates
Technology is a perpetual cost restaurants must incur to maintain their digital ecosystems
All companies across all restaurant segments are increasing investments in digital and the majority are partnering with third-party aggregators for delivery
Select companies are also making big investments in outside firms as they seek to gain a competitive advantage against peers (accelerate digital innovation, access to talent, etc.)
February 2018: $200MM in Grubhub July 2018: Acquires license for CardFree December 2018: Acquires QuikOrder for $77MM February 2019: $25MM digital investment, including $15MM for Accenture partnership March 2019: $100MM investment in Venture Fund that invests in food & retail startups March 2019: $300MM to acquire Dynamic Yield startup & $5MM investment in Plexure
10
Technology Comes At A Cost Restaurant Level
Source: Company data, Credit Suisse estimates
Infrastructure, Equipment and Software – Back of house/front of house technology and equipment, maintenance fees, support, etc. (annual & one time fees)
Technology/Digital Transaction Fees – Franchisees generally pay fees on every digital order
Credit Card Processing Fees – Digital orders generally transacted with credit/debit cards
Mobile offers and loyalty programs – Many restaurant companies are offering mobile-specific deals to encourage utilization and loyalty programs, with both discounts at the cost of the restaurants
Delivery Fees – Incremental costs: 1) commission costs for third-party delivery; 2) proprietary delivery infrastructure
– Delivery commission costs average ~15-30% of average tickets
11
Delivery is Expensive for Restaurants and Customers
Source: Company data, Credit Suisse estimates
Incremental delivery costs weigh on margins, though higher average tickets and incrementality support better delivery order profitability
Customers pay higher prices for delivery through delivery fees, service fees and inflated menu prices
In-Store
Avg Check
Delivery
1.5x Avg
Check
Delivery
2x Avg
Check
Delivery
1.5x Avg
Check
Delivery
2x Avg
Check
Average Ticket $7.00 $10.50 $14.00 $10.50 $14.00
Food & Paper 28.5% 29.0% 29.0% 29.0% 29.0%
Labor 28.0% 18.7% 14.0% 14.0% 10.5%
Royalty 4.0% 4.0% 4.0% 4.0% 4.0%
Advertising 4.0% 4.0% 4.0% 4.0% 4.0%
Other Operating 12.0% 8.0% 6.0% 6.0% 4.5%
Rent 12.0% 12.0% 12.0% 12.0% 12.0%
Commission 0.0% 20.0% 20.0% 20.0% 20.0%
EBITDA per order 11.5% 4.3% 11.0% 11.0% 16.0%
EBITDA $ per order $0.81 $0.45 $1.54 $1.16 $2.24
Cost of Delivery - Restaurant Level
Assumes IncrementalityNo Incrementality
In-Store
Avg Check
Delivery
1.5x Avg
Check
Delivery
2x Avg
Check
Delivery
1.5x Avg
Check
Delivery
2x Avg
Check
Average Ticket $7.00 $10.50 $14.00 $10.50 $14.00
% Menu Price Adjustment 20% 20%
Adjusted Average Ticket $12.60 $16.80
Delivery Fee $1.99 $1.99 $1.99 $1.99
Service Fee 15.0% 15.0% 15.0% 15.0%
Small Order Fee (if appicable) $2.00 $2.00 $2.00 $2.00
Order Cost to Customer $7.00 $14.07 $18.09 $16.48 $21.31
Cost of Delivery - Customer Level
No Menu Price Adj. Menu Price Adj.
12
Restaurants are trading at ~12x NTM EV/EBITDA, nearly ~2x above the 10-yr average of ~10.3x and at a P/E of ~20x earnings, relatively in-line with the 10-yr average
Restaurants trade at premium valuations driven by: higher unit growth opportunities, international exposure, lower inventory risk, lower impact from digital/online shift
– Within restaurants, companies with heavily franchised business models and strong unit growth prospects trade at higher valuations
Restaurant Valuation
Source: FactSet, Credit Suisse estimates
NTM P/E NTM EV/EBITDA
6.0x
7.0x
8.0x
9.0x
10.0x
11.0x
12.0x
13.0x
14.0x
May-
09
May-
10
May-
11
May-
12
May-
13
May-
14
May-
15
May-
16
May-
17
May-
18
May-
19
NTM
EV
/EB
ITD
A
NTM EV/EBITDA 10-yr Avg +1 Std Dev -1 Std Dev
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
22.0x
24.0x
26.0x
28.0x
30.0x
May-
09
May-
10
May-
11
May-
12
May-
13
May-
14
May-
15
May-
16
May-
17
May-
18
May-
19
NTM
P/E
NTM P/E 10-yr Avg +1 Std Dev -1 Std Dev
CMG
DPZYUMDNKN
MCDQSR SBUX
PZZAWEN
JACK
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
22.0x
24.0x
26.0x
28.0x
0.0% 2.0% 4.0% 6.0% 8.0%
NTM
EV
/EB
ITD
A
3-yr Unit CAGR (2019-2021)
WENPZZA
DPZ
YUM
DNKNMCD
QSR
JACK
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
22.0x
85% 90% 95% 100%
NTM
EV
/EB
ITD
A
% Franchised
13
Credit Suisse Coverage Valuation
Source: Company data, FactSet, Consensus Metrix, Credit Suisse estimates
EV/EBITDA vs 3-yr Unit CAGR
EV/EBITDA vs SSS
EV/EBITDA – Current vs 3-yr Historical
EV/EBITDA vs % Franchised
SHAK
CMG
DPZYUM
DNKN MCDQSR SBUX
PZZAWEN
JACK
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
22.0x
24.0x
26.0x
28.0x
30.0x
0.0% 2.0% 4.0% 6.0% 8.0%
NTM
EV
/EB
ITD
A
3-yr SSS Avg (2019-2021)
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
22.0x
24.0x
26.0x
28.0x
30.0x
SH
AK
CM
G
DP
Z
YU
M
DN
KN
MC
D
QS
R
SB
UX
PZ
ZA
WE
N
JA
CK
NTM
EV
/EB
ITD
A
Current NTM EV/EBITDA 3-yr Avg NTM EV/EBITDA
14
Restaurants Coverage Summary
Source: Company data, FactSet, Credit Suisse estimates
Current Mkt Ent. EV/EBITDA P/E Net Short
CS CS Price Cap Value 3-yr 3-yr Div. Debt/ Int. as %
Ticker Company Rating PT 6/21/19 ($BN) ($BN) Avg Avg Yield EBITDA of Float
Quick Service Restaurants
DNKN Dunkin' Brands U $70 $80 $6.6 $9.1 18.3x 15.7x 26.4x 23.3x 1.9% 5.1x 6%
DPZ Domino's Pizza O $320 $280 $11.8 $15.3 20.4x 19.2x 29.0x 25.9x 0.9% 4.8x 9%
JACK Jack in the Box U $75 $85 $2.2 $3.4 12.1x 11.9x 19.1x 17.6x 1.9% 4.3x 15%
LOCO El Pollo Loco - - $11 $0.4 $0.5 7.7x 8.6x 15.2x 16.7x 0.0% 1.0x 14%
MCD McDonald's O $230 $204 $157.6 $188.8 18.0x 14.5x 24.8x 21.7x 2.3% 2.8x 1%
PZZA Papa John's International N $45 $44 $1.4 $1.7 17.1x 14.7x 36.8x 37.3x 1.8% 2.7x 30%
QSR Restaurant Brands International O $78 $70 $32.7 $42.2 17.1x 17.3x 25.5x 23.8x 2.9% 4.0x 4%
SBUX Starbucks Corporation O $92 $84 $104.8 $110.1 17.5x 14.1x 29.0x 25.1x 1.7% 0.9x 2%
WEN The Wendy's N $20 $19 $4.6 $6.8 15.0x 14.0x 30.3x 26.4x 2.0% 5.0x 7%
YUM Yum! Brands N $106 $110 $34.7 $44.7 20.1x 16.4x 28.3x 24.8x 1.5% 4.7x 2%
Average 16.3x 14.6x 26.4x 24.3x 3.5x
Fast Casual Restaurants
CMG Chipotle Mexican Grill O $870 $727 $20.4 $20.1 25.8x 19.5x 53.0x 47.7x 0.0% -0.4x 7%
FRGI Fiesta Restaurant Group - - $13 $0.3 $0.4 6.5x 8.0x 21.0x 19.0x 0.0% 1.1x 5%
HABT The Habit Burger Grill - - $10 $0.2 $0.2 5.9x 7.5x 83.7x 90.9x 0.0% -0.8x 9%
NDLS Noodles & Company - - $7 $0.3 $0.3 9.1x 9.7x 43.7x 49.5x 0.0% 1.0x 13%
PBPB Potbelly Corporation - - $5 $0.1 $0.1 4.1x 6.9x 338.7x 36.0x 0.0% -0.6x 8%
SHAK Shake Shack O $77 $67 $2.5 $2.5 28.4x 23.4x 113.8x 84.2x 0.0% -0.7x 17%
WING Wingstop - - $92 $2.7 $3.0 47.1x 30.9x 119.8x 72.1x 0.4% 4.9x 13%
Average 18.1x 15.1x 110.5x 57.1x 0.6x
Casual Dining Restaurants
BJRI BJ's Restaurants - - $43 $0.9 $1.0 7.3x 8.4x 18.5x 22.1x 1.2% 0.6x 11%
BLMN Bloomin' Brands - - $19 $1.7 $2.7 6.6x 7.1x 11.4x 13.4x 2.2% 2.4x 5%
CAKE Cheesecake Factory - - $44 $2.0 $2.0 9.0x 9.3x 16.4x 17.3x 3.0% 0.2x 24%
CBRL Cracker Barrel Old Country Store - - $168 $4.0 $4.3 10.7x 10.0x 18.3x 16.8x 3.1% 0.6x 16%
CHUY Chuy's Holdings - - $23 $0.4 $0.4 8.6x 9.7x 23.9x 22.9x 0.0% -0.4x 12%
DFRG Del Frisco's Restaurant Group - - $7 $0.2 $0.5 9.1x 7.2x -28.0x -76.4x 0.0% 5.7x 26%
DIN Dine Brands Global - - $95 $1.7 $3.0 10.7x 10.4x 13.0x 12.6x 2.9% 4.6x 10%
DRI Darden Restaurants - - $121 $15.2 $15.7 11.9x 10.4x 18.9x 17.3x 3.0% 0.4x 6%
EAT Brinker International - - $38 $1.4 $2.7 7.2x 7.9x 9.4x 10.8x 4.0% 3.3x 32%
PLAY Dave & Buster's Entertainment - - $40 $1.5 $1.9 7.6x 8.5x 13.0x 14.9x 1.5% 1.3x 19%
RRGB Red Robin Gourmet Burgers - - $31 $0.4 $0.6 9.7x 6.2x 25.6x 18.9x 0.0% 1.2x 32%
RUTH Ruth's Hospitality Group - - $22 $0.7 $0.7 9.8x 10.1x 15.7x 17.3x 2.3% 0.5x 4%
TXRH Texas Roadhouse - - $52 $3.8 $3.6 11.7x 11.9x 22.1x 23.5x 2.3% -0.6x 8%
Average 9.2x 9.0x 13.7x 10.1x 1.5x
NTM NTM
15
Credit Suisse Relative Rankings
Source: Company data, FactSet, Credit Suisse estimates
Digital DeliveryProduct
InnovationValue Domestic International
Sales
Leverage
Cost
Savings
CMG O
SHAK O
DPZ O
MCD O
QSR O
SBUX O
WEN N
PZZA N
YUM N
DNKN U
JACK U
SSSStrategic
Optionality
Credit
Suisse
Rating
Global Whitespace
OpportunityMargin Prospects
16
US Restaurants Overview
17
US Consumers Spend ~$1.6 Trillion On Food Annually
Source: USDA, Credit Suisse estimates
Food Away From Home Food At Home
$311BN
$869BN
$436BN
$747BN
$314BN $5BN$36BN
$203BN
$172BN $15BN
$124BN
Full Service
Restaurants
Limited
Service
Restaurants
Drinking
Places
Hotels &
Motels
Other Food Away
From Home
Grocery Warehouse
Clubs & Mass
Merchants
Convenience
Stores
Other Stores &
Foodservice
Food At
Home
18
Source: USDA, Credit Suisse estimates
Food Share Shifting Away From Home
US Food Expenditures – Food At Home vs Food Away From Home
US Food Expenditures – Composition
Consumers spend more money are increasingly eating more meals away from home, with food away from home now representing a greater share of overall food spend
Restaurants have gained ~6pp of stomach share over the last 20 years, relative to grocery which has lost ~11pp of share
0%
10%
20%
30%
40%
50%
60%
70%
80%
19
49
19
53
19
57
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97
20
01
20
05
20
09
20
13
20
17
% F
ood E
xpenditu
res
Food At Home Food Away From Home
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
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
20
17
% F
ood E
xpenditu
res
Grocery Warehouse Clubs & Mass Merchants Restaurants
19
Source: US Census Bureau, Credit Suisse estimates
Restaurants Are Gaining Consumer Wallet Share
US Restaurants As % of Retail Wallet Share
US Restaurants & Retail Sales Growth
Restaurants represent ~11% of consumer retail wallet spend, an increase of ~250bps over the last 20 years
Restaurant sales growth has outpaced overall retail sales and accelerated in recent years
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
20-yr CAGR 5-yr CAGR 1-yr Growth
% G
row
th
Restaurant Sales Retail & Foodservice Sales
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Jan-9
9
Dec-
99
Nov-
00
Oct
-01
Sep-0
2
Aug-0
3
Jul-04
Jun-0
5
May-
06
Apr-
07
Mar-
08
Feb-0
9
Jan-1
0
Dec-
10
Nov-
11
Oct
-12
Sep-1
3
Aug-1
4
Jul-15
Jun-1
6
May-
17
Apr-
18
Mar-
19
% W
alle
t S
hare
Full Service Restaurants Limited Service Restaurants
20
Source: US Bureau of Labor Statistics, US Census Bureau, Credit Suisse estimates
Structural Changes Women At Work
Female Labor Participation Rate & % Share of Food Expenditures
Women’s Age at First Marriage & % Food Away From Home Expenditure
The increase of women in the labor force over the last several decades has been a notable factor in driving an increase in food away from home stomach share…
…with delayed marriages (and families) likely to maintain “younger generational trends” longer than prior generations
20%
30%
40%
50%
60%
70%
80%
19
50
19
54
19
58
19
62
19
66
19
70
19
74
19
78
19
82
19
86
19
90
19
94
19
98
20
02
20
06
20
10
20
14
20
18
Female Labor Participation Rate % FAFH % FAH
Correlation: 0.96
R2: 0.92
16
18
20
22
24
26
28
30
32
20%
25%
30%
35%
40%
45%
50%
55%
60%
19
50
19
54
19
58
19
62
19
66
19
70
19
74
19
78
19
82
19
86
19
90
19
94
19
98
20
02
20
06
20
10
20
14
20
18
Media
n A
ge a
t Firs
t M
arr
iage
% F
ood A
way
Fro
m H
om
e (
FA
FH
)
% FAFH Women's age at first marriage Men's age at first marriage
Correlation: 0.97
R2: 0.93
21
Source: US Census Bureau, Credit Suisse estimates
Structural Changes Living Arrangements
% Adults 25-34 Years Old Living At Home
% Adults 18+ Years Old Living Alone
Adults are moving out of their parents’ houses later, with ~17% of adults 25-34 years old still living at home, the highest in history
There are also more adults living alone than ever before
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
% A
dults
25
-34 L
ivin
g A
t H
om
e
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
20
15
20
18
% A
dults
18+
Liv
ing A
lone
22
Source: US Census Bureau, Credit Suisse estimates
Structural Changes Household Composition
Single-Person Households in US
Median Age of Homeowner
The number of single-person households continues to rise, now representing ~28% of total households …
… and Americans are buying houses later, with the median age of homeowners now at the highest level in more than 50 years
42
44
46
48
50
52
54
19
60
19
63
19
66
19
69
19
72
19
75
19
78
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
Media
n A
ge o
f H
om
eow
ner
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
0
20
40
60
80
100
120
140
19
60
19
63
19
66
19
69
19
72
19
75
19
78
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
% S
ingle
-Pers
on H
ouse
hold
s
# S
ingle
-Pers
on H
ouse
hold
s (0
00s)
# Single-Person Households % Single-Person Households
23
Source: Prodco, Bloomberg, Forrester, Credit Suisse estimates
Shifts In Consumption Trends Shopping
Retail Traffic Trends
E-commerce as % of Retail Sales
It’s no surprise retail traffic trends are down, which is likely a headwind for restaurants overall…
…as consumers increasingly shop online
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13
3Q
13
1Q
14
3Q
14
1Q
15
3Q
15
1Q
16
3Q
16
1Q
17
3Q
17
1Q
18
3Q
18
1Q
19
Reta
il Tra
ffic
Retail traffic continues to trend negative as consumers
shift online
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
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
20
17
20
18
E-C
om
merc
e a
s %
of
Reta
il S
ale
s
E-commerce now
represents ~13-14% of
retail sales, with
penetration that has more
than doubled over the last
decade
24
Source: eMarketer, Credit Suisse estimates
Shifts In Consumption Trends Content
Cord Cutters & Penetration
Subscription Over-the-Top (OTT) Video Service Users & Penetration
Consumers are increasingly shifting to alternative providers for content, forgoing pay-TV for other subscription services (i.e. Netflix, Hulu, HBO Now, Amazon Video, YouTube Red, etc.)
Subscription service providers often offer creative content, customization, engagement with audiences and increased convenience (i.e. streaming direct through phone/tablet vs TV)
25
33
39
45
50
55
0%
5%
10%
15%
20%
25%
0MM
10MM
20MM
30MM
40MM
50MM
60MM
2017 2018 2019 2020 2021 2022
% P
opula
tion
Cord
Cutters
Cord Cutters (MM) % Population
153
170
182 188
193 198
44%
46%
48%
50%
52%
54%
56%
58%
60%
62%
100MM
120MM
140MM
160MM
180MM
200MM
220MM
2017 2018 2019 2020 2021 2022
% P
opula
tion
Subsc
riptio
n O
TT V
ideo S
erv
ice U
sers
Subscription OTT Video Service Users % Population
25
Source: Euromonitor, Credit Suisse estimates
Shift in Consumption Trends Restaurant Ordering
Digital Sales as % of Limited Service Restaurant Sales
Delivery as % of Limited Service Restaurant Sales
Industry estimates suggest digital ordering will comprise ~12% of limited service restaurant sales by 2022 (which could even be conservative)
Delivery is estimated to represent ~11% of limited service restaurant sales over the next four years (and estimates have continued to increase)
2%2% 3%
4%
6%7%
8%
10%
11%12%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
20
13
20
14
20
15
20
16
20
17
20
18
20
19E
20
20E
20
21E
20
22E
Dig
ital as
% o
f LS
R S
ale
s
7%8%
8%8%
9%
9%
10%10%
10%11%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
20
13
20
14
20
15
20
16
20
17
20
18
20
19E
20
20E
20
21E
20
22E
Deliv
ery
as
% o
f S
ale
s
26
Source: US Census Bureau, US Bureau of Labor Statistics, Credit Suisse estimates
Restaurants Sales Growth ~5% Over Last 20 Years Contribution from ~3% SSS & ~2% Unit Growth
US Restaurants Sales US Restaurants Sales SSS & Unit Growth
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
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
20
17
20
18
Rest
aura
nts
Sale
s G
row
th
20-yr Avg: 5%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
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
20
17
20
18
Rest
aura
nts
Sale
s G
row
th
SSS Unit Growth
60% of restaurant sales growth has come from SSS and 40% of growth generated from unit growth
27
Source: US Bureau of Labor Statistics, Credit Suisse estimates
Consumers Allocate “Food Budget” Differently by Age
Share of Food Away From Home Meals by Age Food & Food Away From Home Expenditures as % of Total by Age
Consumers across age groups spend ~12-14% of their budgets on food
Younger consumers:
– Spend more of their “food budget” on food away from home
– Spend more on fast food, takeout & delivery
The younger the consumer, the more is spent away from home and off-premise, highlighting the importance of resonating with younger generations
7.0%
6.2%
6.2%
5.6%
5.0%
5.1%
14.2%
13.4%
13.6%
12.5%
12.2%
12.8%
<25 years old
25-34 years old
35-44 years old
45-54 years old
55-64 years old
65+ years old
% Average Expenditures
Food Away From Home Food At Home
56%
51%
48%
44%
42%
33%
37%
44%
46%
51%
54%
65%
<25 years old
25-34 years old
35-44 years old
45-54 years old
55-64 years old
65+ years old
% Food Away From Home Spend
Fast Food/Takeout/Delivery Full Service RestaurantsVending Machines Employer & School Cafeterias
28
Source: US Bureau of Labor Statistics, Credit Suisse estimates
Food Away From Home Gaining Share Across Age Groups
Change in Share of Food Away From Home Meals by Age (2017vs 2010) Change in Food Away From Home Share by Age (2017 vs 2010)
Consumers are spending more on meals away from home across age groups
Fast food/takeout/delivery has gained the most incremental share from consumers <25 years old
Fast food/takeout/delivery is gaining share among younger and older consumers
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
<25 years
old
25-34
years old
35-44
years old
45-54
years old
55-64
years old
65+ years
old
Chg in
Food A
way
Fro
m H
om
e S
hare
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
<25 years
old
25-34
years old
35-44
years old
45-54
years old
55-64
years old
65+ years
old
Chg in
% S
hare
of
FA
FH
Meals
Fast food/takeout/delivery Full service restaurants
Vending machines Employer & school cafeterias
29
Source: Conference Board, Bureau of Labor Statistics, Credit Suisse estimates
Macro Trends Largely Favorable For Restaurant Growth
Disposable Income Growth
Average Hourly Earnings Growth
Consumer Sentiment
Unemployment Rate
0
20
40
60
80
100
120
140
160
Jan-0
0S
ep-0
0M
ay-
01
Jan-0
2S
ep-0
2M
ay-
03
Jan-0
4S
ep-0
4M
ay-
05
Jan-0
6S
ep-0
6M
ay-
07
Jan-0
8S
ep-0
8M
ay-
09
Jan-1
0S
ep-1
0M
ay-
11
Jan-1
2S
ep-1
2M
ay-
13
Jan-1
4S
ep-1
4M
ay-
15
Jan-1
6S
ep-1
6M
ay-
17
Jan-1
8S
ep-1
8M
ay-
19
Consu
mer
Confidence
Index
US Consumer
Confidence approaching
peak levels
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
1Q
00
1Q
01
1Q
02
1Q
03
1Q
04
1Q
05
1Q
06
1Q
07
1Q
08
1Q
09
1Q
10
1Q
11
1Q
12
1Q
13
1Q
14
1Q
15
1Q
16
1Q
17
1Q
18
1Q
19
Unem
plo
yment
Rate
Unemployment is
at its lowest levels
since 2000 &
expected to
remain below
historical levels
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q
00
1Q
01
1Q
02
1Q
03
1Q
04
1Q
05
1Q
06
1Q
07
1Q
08
1Q
09
1Q
10
1Q
11
1Q
12
1Q
13
1Q
14
1Q
15
1Q
16
1Q
17
1Q
18
1Q
19
Dis
posa
ble
Inco
me G
row
th
Disposable income has been
strong in recent years, a
positive for restaurant
spend
1.5%
1.7%
1.9%
2.1%
2.3%
2.5%
2.7%
2.9%
3.1%
3.3%
3.5%
Feb-1
3
Jul-13
Dec-
13
May-
14
Oct
-14
Mar-
15
Aug-1
5
Jan-1
6
Jun-1
6
Nov-
16
Apr-
17
Sep-1
7
Feb-1
8
Jul-18
Dec-
18
May-
19
Ave
rage H
ourly
Earn
ings
Gro
wth
Average hourly earnings
growth has continued to
accelerate
30
Source: Bureau of Economic Analysis, Energy Information Administration, USDA, Credit Suisse estimates
Backdrop is Largely Stable or Improving
Gas Prices
Personal Savings Rates
Personal Consumption Expenditures (PCE)
Food At Home/Food Away From Home CPI Inflation Gap
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Jan-1
3
Jun-1
3
Nov-
13
Apr-
14
Sep-1
4
Feb-1
5
Jul-15
Dec-
15
May-
16
Oct
-16
Mar-
17
Aug-1
7
Jan-1
8
Jun-1
8
Nov-
18
Apr-
19
Sep-1
9
Feb-2
0
Jul-20
Dec-
20
$/G
allo
n
Gas prices are expected to
remain at relatively similar
levels over the next 18
months-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q
00
1Q
01
1Q
02
1Q
03
1Q
04
1Q
05
1Q
06
1Q
07
1Q
08
1Q
09
1Q
10
1Q
11
1Q
12
1Q
13
1Q
14
1Q
15
1Q
16
1Q
17
1Q
18
1Q
19
PC
E G
row
th
Total PCE Food Services & Accomodations
PCE growth and food
service & accomdations
growth remain strong
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Jan-0
0
Dec-
00
Nov-
01
Oct
-02
Sep-0
3
Aug-0
4
Jul-05
Jun-0
6
May-
07
Apr-
08
Mar-
09
Feb-1
0
Jan-1
1
Dec-
11
Nov-
12
Oct
-13
Sep-1
4
Aug-1
5
Jul-16
Jun-1
7
May-
18
Apr-
19
FA
H/F
AFH
CP
I G
ap
FAH/FAFH CPI
inflation gap remains
elevated, making
restaurants relatively
more expensive than
grocery
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Mar-
00
Mar-
01
Mar-
02
Mar-
03
Mar-
04
Mar-
05
Mar-
06
Mar-
07
Mar-
08
Mar-
09
Mar-
10
Mar-
11
Mar-
12
Mar-
13
Mar-
14
Mar-
15
Mar-
16
Mar-
17
Mar-
18
Mar-
19
Pers
onal S
avi
ngs
Rate
The savings rate has been
relatively stable though still
slightly above the ~6% average
31
Source: Black Box, USDA, Credit Suisse estimates
CPI Inflation Gap Remains Elevated Restaurants More Expensive Relative to Grocery
2.2%
2.7%
2.1%
1.4%
0.7%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1-yr Avg 3-yr Avg 5-yr Avg 10-yr Avg 20-yr Avg
FA
H/F
AFH
CP
I In
flatio
n G
ap
Food At Home/Food Away From Home CPI Inflation Gap Over Time FAH/FAFH CPI Inflation Gap vs Restaurant Traffic
The Food At Home (FAH)/Food Away From Home (FAFH) CPI Inflation gap has remained
elevated, making restaurant prices relatively more expensive than grocery
– Over the last year, the gap has narrowed (1-yr avg 2.2% vs 3-yr avg 2.7%), though is 2x as wide as the 10-yr avg (1.4%)
Restaurant traffic has exhibited a relatively strong relationship with the CPI inflation gap over time
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
Apr-
12
Sep-1
2
Feb-1
3
Jul-13
Dec-
13
May-
14
Oct
-14
Mar-
15
Aug-1
5
Jan-1
6
Jun-1
6
Nov-
16
Apr-
17
Sep-1
7
Feb-1
8
Jul-18
Dec-
18
Black Box Restaurant Traffic FAH/FAFH CPI Gap
Correlation Since 2012: 0.6
Correlation Since 2014: 0.7
32
Source: Black Box, Credit Suisse estimates
SSS are primarily being driven by price increases, rather than traffic growth
Black Box Traffic & Average Check Black Box SSS
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Jan-1
2
May-
12
Sep-1
2
Jan-1
3
May-
13
Sep-1
3
Jan-1
4
May-
14
Sep-1
4
Jan-1
5
May-
15
Sep-1
5
Jan-1
6
May-
16
Sep-1
6
Jan-1
7
May-
17
Sep-1
7
Jan-1
8
May-
18
Sep-1
8
Jan-1
9
May-
19
Rest
aura
nt
Indust
ry S
SS
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Jan-1
2
May-
12
Sep-1
2
Jan-1
3
May-
13
Sep-1
3
Jan-1
4
May-
14
Sep-1
4
Jan-1
5
May-
15
Sep-1
5
Jan-1
6
May-
16
Sep-1
6
Jan-1
7
May-
17
Sep-1
7
Jan-1
8
May-
18
Sep-1
8
Jan-1
9
May-
19
Rest
aura
nt
Indust
ry S
SS
Traffic Avg Check
33
Source: Company data, Consensus Metrix, Credit Suisse estimates
Restaurant Industry SSS Expectations Imply Acceleration in 2019 & 2020
Restaurant Industry SSS Consensus Estimates Restaurant Industry SSS 20-yr Historical
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1Q
14
3Q
14
1Q
15
3Q
15
1Q
16
3Q
16
1Q
17
3Q
17
1Q
18
3Q
18
1Q
19
3Q
19
E
1Q
20
E
3Q
20
E
Rest
aura
nt
Indust
ry S
SS
Consensus estimates a ~50bps SSS acceleration
in 2019 to 2.6%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q
98
1Q
99
1Q
00
1Q
01
1Q
02
1Q
03
1Q
04
1Q
05
1Q
06
1Q
07
1Q
08
1Q
09
1Q
10
1Q
11
1Q
12
1Q
13
1Q
14
1Q
15
1Q
16
1Q
17
1Q
18
1Q
19
Rest
aura
nt
Indust
ry S
SS
20-yr Avg: 3%
34
Key Themes
35
Delivery
36
Source: Euromonitor, Technomic, Credit Suisse estimates
Delivery channel small & growing
Off-premise
~$300BN
Total Restaurant Industry
~$600BN
Delivery represents ~$35BN of US restaurant sales, though is expected to outpace overall restaurant growth over the next several years as consumers increase utilization, awareness increases, restaurants expand offerings and third party partnerships expand coverage
Restaurant Industry
~$600BN
Off-premise $300BN
Delivery
$35BN
37
Source: Credit Suisse estimates
Are Delivery Sales Incremental? Yes…for now
On average, restaurant companies have indicated delivery is ~65-70% incremental
– Majority of delivery sales appear to be generated in afternoon/late night during underutilized dayparts and can likely offset lost sales during inclement weather
Incrementality generated from both increased order sizes and transaction growth
– Average Check – more group orders; add-ons (avg check ~1.5-2x size of traditional in-store order)
– Transactions – replacing cooking; gaining share from restaurants not offering delivery
Some operators appear to be skeptical delivery is truly incremental to the business against a backdrop of relatively flat to negative traffic and sales
– But delivery is both an offensive & defensive strategy
Over time, we expect the incrementality of delivery to decrease as the channel grows and more restaurants/alternative food providers offer delivery – the winners will be restaurants enhancing operations and building an infrastructure to support sustainable channel
38
Source: Credit Suisse survey
Delivery Is Taking Share Away From Home Convenience driving delivery growth
Delivery is incremental to the restaurant industry – 50% of consumers are eating delivery more often because they are cooking less
Convenience is driving demand for delivery (in an industry based on convenience) – 60% of consumers are eating delivery more often because they don’t feel like cooking; 50% of consumers are eating delivery more often because they don’t have time to cook
Consumers Eating Delivery MORE Often Consumers Eating Delivery MORE Often
Both eating at
restaurants &
cooking less
33%
Cooking less
49%
Eating at
restaurants less
18%
If you said you have been eating restaurant food delivery
MORE often, are you:
60%
49%
31%
10%
0%
10%
20%
30%
40%
50%
60%
70%
Don't feel like
cooking
Don't have time to
cook
Don't feel like
going out to a
restaurant
Cheaper than
grocery
shopping/cooking
% R
esp
odents
If you said you have been eating restaurant food delivery
MORE often, what are the reasons?
Survey conducted among ~1,200 consumers in March 2019.
39
Source: Restaurant Research Journal, Credit Suisse survey
Majority of Delivery During Underutilized Dayparts
Delivery transactions are largely occurring at underutilized dayparts – 82% of consumers indicated they are ordering delivery at dinner; majority of QSR sales are during breakfast and lunch
– Commentary from restaurant companies also suggests most delivery orders are coming in during underutilized times (dinner, late night, weekends)
Average QSR Daypart Mix Delivery by Daypart
Breakfast
11%
Lunch
43%Dinner
31%
Late
Night/Snack
17%
3%
13%9%
82%
13%
4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Morn
ing
(7-1
1A
M)
Lunch
(11A
M-1
PM
)
Aft
ern
oon
(1-4
PM
)
Din
ner
(4-9
PM
)
Late
Nig
ht
(9P
M-1
2A
M)
Very
Late
Nig
ht
(A
fter
12
AM
)
% R
esp
ondents
What part of the day do you usually order delivery?
Survey conducted among ~1,200 consumers in March 2019.
40
Source: Credit Suisse survey
Delivery Utilization Growing Across All Markets
Consumers order delivery the most in urban markets –70% of consumers in urban markets indicated they order delivery at least 1-2x per month (vs. ~50% of consumers on average)
But delivery is growing across ALL markets – from our surveys conducted in March 2019 relative to our July 2018 survey, a greater percentage of consumers across urban, suburban and rural neighborhoods indicated they order delivery at least 1-2x per month (meaning there are less consumers that have never ordered delivery as availability increases)
Delivery Order Frequency by Neighborhood – March 2019 vs July 2018 Delivery Order Frequency by Neighborhood
Survey conducted among ~1,200 consumers in March 2019 & ~1,200 consumers in July 2018.
37% 30% 35%
57%
41%42%
44%
30%
16% 21% 16%9%
6% 7% 6% 4%
0%10%20%30%40%50%60%70%80%90%
100%
Average Urban Suburban Rural
Neighborhood
% R
esp
ondents
How often do you order restaurant food delivery
at home per month?
Never 1-2 times per month 3-4 times per month 5 or more times per month
59%
48%
39%
70%65%
43%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Urban Suburban Rural
Neighborhood
% R
esp
ondents
How often do you order restaurant food delivery at home
per month? "1-5+ Times Per Month"
July 2018 March 2019
41
Source: Credit Suisse survey
Delivery Should Continue to Grow Across All Markets
Consumers in all neighborhoods expect to order delivery more – more than 50% of consumers in all neighborhoods are likely to order delivery over the next 12 months
Delivery intent is growing – from our surveys conducted in March 2019 to July 2018, more consumers across urban, suburban and rural neighborhoods indicated they are likely to order delivery over the next 12 months (i.e. 79% of consumers in urban markets were likely to order delivery over the NTM in our March 2019 survey vs 66% in our July 2018 survey)
Delivery Order Intent Over Next 12 Months – March 2019 vs July 2018 Delivery Order Intent Over Next 12 Months
Survey conducted among ~1,200 consumers in March 2019 & ~1,200 consumers in July 2018.
79%72%
56%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Urban Suburban Rural
% R
esp
ondents
What is the likelihood you order restaurant food delivery
over the next 12 months?
Very likely Somewhat likely
66%60%
51%
79%72%
56%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Urban Suburban Rural
% R
esp
ondents
What is the likelihood you order restaurant food delivery
over the next 12 months? "Very likely/Somewhat likely"
July 2018 March 2019
42
Source: Credit Suisse survey
Delivery Pervasive Across All Age Groups
Consumers across all age groups are ordering delivery – 65% of consumers order delivery at least 1-2x per month
The majority of consumers across age groups are likely to order delivery going forward – 70%+ of consumers 18-60 years old are likely to order delivery over the next 12 months
Delivery Order Intent Over Next 12 Months by Age Delivery Order Frequency by Age
Survey conducted among ~1,200 consumers in March 2019.
35% 32%23%
34%
60%
42%39%
45%
48%
28%
17%20% 22%
15% 8%6% 9% 9% 4% 5%
0%10%20%30%40%50%60%70%80%90%
100%
Average 18-29 30-44 45-60 60+
Age
% R
esp
ondents
How often do you order restaurant food delivery
at home per month?
Never 1-2 times per month 3-4 times per month 5 or more times per month
73%78%
73%
50%
0%10%20%30%40%50%60%70%80%90%
100%
18-29 30-44 45-60 60+
Age
% R
esp
ondents
What is the likelihood you order restaurant food delivery
over the next 12 months?
Very likely Somewhat likely
43
Source: Credit Suisse survey
How Do You Get People to Order Delivery MORE Often?
Potential Delivery Demand Drivers – “Free Delivery” Potential Delivery Demand Drivers
Reducing delivery costs could be the best way to drive delivery growth – consumers indicated free delivery, special discounts and loyalty points/rewards as top factors that would get them to order delivery more (65% free delivery, 40% special discounts, 38% loyalty points/rewards)
Free delivery is the #1 way to increase delivery orders across age groups & frequency levels – “Free delivery” was indicated as the top factor that would drive increased delivery demand across every age and delivery frequency level
Survey conducted among ~1,200 consumers in March 2019.
65%
40%
38%
33%
31%
18%
9%
Free delivery
Special discounts only for delivery
Loyalty points/rewards
More restaurant/cuisine options
Favorite restaurant starts to offer delivery
LTOs available only for delivery
Nothing
% Respondents
What would get you to eat restaurant food delivery
MORE often?
62%
67%
63%
67%71%
67%62%
53%
Never 1-2 times 3-4 times 5+ times 18-29 30-44 45-60 60+
Delivery Frequency Per Month Age
What would get you to eat restaurant food delivery
MORE often? - "Free Delivery"
44 Source: Credit Suisse survey
Younger Consumers Want Delivery – But They Don’t Want the Cost
Potential Delivery Demand Drivers – “Free Delivery” Potential Delivery Demand Drivers – 18-29 Year Olds vs Average
Younger consumers would have a greater response to reduced delivery costs than the
average consumer – more consumers 18-29 years old indicated free delivery, loyalty/rewards and special discounts would lead them to order delivery more often relative to the average consumer
Non-delivery users would be even more incentivized to order delivery with free delivery and
special discounts – 78% of consumers 18-29 years old that don’t order delivery indicated free delivery would get them to order delivery more often; this compares to 67% of 18-29 year olds that order delivery at least 1-2x per month
Survey conducted among ~1,200 consumers in March 2019.
78%
54%
48%
29%
28%
17%
3%
67%
53%
49%
35%
26%
28%
2%
Free delivery
Special discounts only for delivery
Loyalty points/rewards
More restaurant/cuisine options
Favorite restaurant offers delivery
LTOs available only for delivery
Nothing
% Respondents
What would get you to eat restaurant food delivery
MORE often?
Age 18-29 Non-Delivery Users Age 18-29 Delivery Users
-6%
7%
-4%
1%
11%
13%
7%
Nothing
LTOs available only for delivery
Favorite restaurant starts to offer delivery
More restaurant/cuisine options
Special discounts only for delivery
Loyalty points/rewards
Free delivery
% Respondents
What would get you to eat restaurant food delivery
MORE often (Age 18-29 vs Average)?
45
Source: PitchBook, Sensor Tower, Credit Suisse estimates
Third-Party Delivery Platforms Friend or Foe?
Third-party platforms have expanded coverage, customer acquisition and restaurant acquisition over the last couple of years, which we view as largely complementary to restaurant industry sales growth
Over the last few years, there has been meaningful growth in the number of deals in the restaurant delivery/ordering platform space
Delivery apps are growing at a much faster rate than the pizza segment (digital app leaders), indicative of increasing demand and expanding geographical coverage
Pizza vs Delivery Apps Download Share Restaurant Delivery & Ordering Platform Deals
Note: Pizza apps include 10 of the largest national pizza chains. Delivery apps
include 9 of the largest national delivery/digital restaurant service providers.
0
10
20
30
40
50
60
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
# D
eliv
ery
/Ord
ering P
latf
orm
Deals
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Jan-
12
Jun-1
2
Nov
-12
Apr-
13
Sep-
13
Feb-
14
Jul-
14
Dec-
14
May
-15
Oct
-15
Mar
-16
Aug-
16
Jan-
17
Jun-1
7
Nov
-17
Apr-
18
Sep-
18
Feb-
19
Dig
ital A
pp D
ow
nload
Sha
re
Pizza Apps Delivery Apps
46
Are Large Chains Positioned to Win on Delivery? In Our View, Yes
Delivery platforms help level the playing field for regional chains & locals to compete against the larger chains
– Opportunity for virtual and ghost kitchens, requiring minimal upfront costs & benefits from shared services
– But high commission costs and little negotiating power could turn delivery orders into unprofitable orders for some smaller restaurant chains
Most large restaurant chains are currently rolling out delivery through partnerships with third-party providers and more favorable deal terms (relative to smaller restaurant companies)
Increasing competition among delivery aggregators and their strategies to acquire large chain restaurants sets a favorable backdrop going forward, with restaurants likely to gain more power
Overall, we believe restaurants that view delivery as a long-term growth driver and integrate digital/delivery across operations will generate higher levels of delivery sales, incremental profit and optimize operations
Source: Credit Suisse estimates
47
Large Chains Helping to Drive Delivery Aggregator Growth QSR chain partnerships are generating accelerating digital downloads for third-party aggregators,
highlighting the demand and value of chains on aggregator platforms
We expect QSR chains could get more favorable rates from aggregators near-term as they (1) recognize the value they bring to the platform and (2) competition among delivery aggregators to attract QSR chains increases
Source: Sensor Tower, Credit Suisse estimates
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
1Q
19
% D
ow
nload
Sha
re Uber Eats
Caviar
DoorDash
Postmates
Delivery.com
Grubhub/Seamless
Uber Eats download share accelerated in 2017 following its announced partnership with McDonald’s
DoorDash downloads are
growing at the fastest rate
relative to competitors –
DoorDash has established more partnerships with large chains
relative to competitors
48
Source: Credit Suisse estimates
Top Delivery Considerations
Economics
– High commission costs pressuring margins
– Restaurants increasingly shifting incremental costs to customer
Data
– Limited access to customer data transacted through third-party platforms
Increasing Competition
– Decreases barriers to entry (ghost kitchens without physical address; pop up shops)
Customer Shifting
– Restaurant customers shifting to third-party platform customers
Quality
– Restaurants lose quality control with last mile, including the customer experience
Operations
– Integration with POS system and digital app, store layouts, alternative solutions
– Increase restaurant complexity
Delivery Drivers
– Ability to acquire and retain delivery drivers is challenging and delivery driver networks need to be sufficient to fulfill demand
49
Future of Delivery– Restaurants Gaining Power Change is Coming Economics
– (1) more favorable commission rates between third-party aggregators and QSR chains going forward as QSRs realize the growth they bring to the platform; (2) higher delivery prices relative to in-store; and (3) costs to increasingly shift to the customer (delivery fees, service fees, small order fees)
Data
– We expect an increased focus on capturing customer data, with integration of delivery into digital apps likely near-term, and limited expectations for data sharing from delivery aggregator to restaurant
Operations
– We expect restaurants will modify layouts with an omni-channel focus & explore alternative formats
Exclusivity
– Commentary from restaurant companies suggest presence on multiple third-party platforms is complementary within a still fragmented market, and we expect most chains to work with multiple aggregators
Marketing Support
– Partnerships with chains has generated significant customer acquisition for delivery aggregators, and we expect large QSR chains to demand greater marketing support (i.e. funding of free delivery campaigns)
Source: Sensor Tower, Credit Suisse estimates
50
Source: Credit Suisse estimates
Economics pressuring margins and profitability of delivery orders Third-party commission costs of ~20-30% drive significant margin pressure and source of concern
among restaurant operators
– Commissions are customer acquisition costs to some extent, but they are perpetual
But, delivery economics may not be as bad as they seem at face value
1) May not require incremental costs, making delivery orders more profitable assuming they are at least partially incremental sales (i.e. unused labor capacity, rent & other fixed costs)
2) Operators may not offer same in-store deals/discounts
3) Generally higher average ticket and could be higher dollar profit, even if margins as a percentage of sales is lower
Restaurants are increasingly shifting delivery costs to customers and improving profitability through:
1) Increased menu prices
2) Delivery fees
3) Service fees
4) Small order fees
Economics
51
Source: Wendy’s App, DoorDash, Seamless App, Credit Suisse estimates
Shifting Delivery Costs to the Customer Increased Menu Prices, Delivery Fees & Service Fees
Wendy’s delivery menu prices ~5-15%
higher than mobile order & pay
YUM charges an additional service fee of 12.5% on
delivery orders to cover commission
Higher Menu Prices: Wendy’s Digital App vs DoorDash Delivery Seamless Additional Service Fee Charged on Taco Bell Delivery
Economics
Wendy’s App DoorDash App
52
Source: Credit Suisse estimates
Delivery is Expensive for Customers
Economics
In-Store
Avg Check
Delivery
1.5x Avg
Check
Delivery
2x Avg
Check
Delivery
1.5x Avg
Check
Delivery
2x Avg
Check
Average Ticket $7.00 $10.50 $14.00 $10.50 $14.00
% Menu Price Adjustment 20% 20%
Adjusted Average Ticket $12.60 $16.80
Delivery Fee $1.99 $1.99 $1.99 $1.99
Service Fee 15.0% 15.0% 15.0% 15.0%
Small Order Fee (if appicable) $2.00 $2.00 $2.00 $2.00
Order Cost to Customer $7.00 $14.07 $18.09 $16.48 $21.31
Cost of Delivery - Customer Level
No Menu Price Adj. Menu Price Adj.
Restaurants are adjusting
menu prices on platforms to offset the cost of delivery
Restaurants and platforms are increasingly shifting costs to the customer
53
Source: Company data, Credit Suisse estimates
Can Delivery Be Margin Accretive? Yes – requires higher average checks and incrementality
Third-party commission costs represent a headwind, but higher average checks and incrementality support margin leverage
– Delivery orders tend to generate average checks 1.5-2x the size of a traditional in-store order
– Restaurants indicate delivery is ~65-70% incremental
Increasing delivery menu prices to cover the incremental costs of delivery should be at least margin neutral (and likely accretive)
Assume slightly higher
packaging costs
Assume leverage from partially fixed labor and operating costs
Economics
In-Store
Avg Check
Delivery
1.5x Avg
Check
Delivery
2x Avg
Check
Delivery
1.5x Avg
Check
Delivery
2x Avg
Check
Average Ticket $7.00 $10.50 $14.00 $10.50 $14.00
Food & Paper 28.5% 29.0% 29.0% 29.0% 29.0%
Labor 28.0% 18.7% 14.0% 14.0% 10.5%
Royalty 4.0% 4.0% 4.0% 4.0% 4.0%
Advertising 4.0% 4.0% 4.0% 4.0% 4.0%
Other Operating 12.0% 8.0% 6.0% 6.0% 4.5%
Rent 12.0% 12.0% 12.0% 12.0% 12.0%
Commission 0.0% 20.0% 20.0% 20.0% 20.0%
EBITDA per order 11.5% 4.3% 11.0% 11.0% 16.0%
EBITDA $ per order $0.81 $0.45 $1.54 $1.16 $2.24
Cost of Delivery - Restaurant Level
Assumes IncrementalityNo Incrementality
54
Source: Credit Suisse survey
The Cost of Convenience Customer Willingness to Pay Delivery Fees
80% of customers indicated they are willing to pay a delivery fee across age groups
On average, 1 in 5 customers are not willing to pay a delivery fee – Among those that don’t order delivery, 1 in 3 customers are not willing to pay a delivery fee –
highlighting incremental costs of delivery as a headwind to attracting new users
Customer Willingness to Pay Delivery Fee – “No Delivery Fee” Customer Willingness to Pay Delivery Fee by Age
Economics
Survey conducted among ~1,200 consumers in March 2019.
30%
17%
10%13%
17%19% 19%
33%
Never 1-2 times 3-4 times 5+ times 18-29 30-44 45-60 60+
Delivery Frequency Per Month Age
What is the most you are willing to pay for a delivery fee?
"No Delivey Fee"
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
18-29 30-44 45-60 60+
% R
esp
ondents
by
Age
What is the most you are willing
to pay for a delivery fee?
$1-$1.99 $2-2.99 $3-3.99 $4-4.99 $5+
65%
40%
38%
33%
31%
18%
9%
Free delivery
Special discounts only for delivery
Loyalty points/rewards
More restaurant/cuisine options
Favorite restaurant starts to offer delivery
LTOs available only for delivery
Nothing
% Respondents
What would get you to eat restaurant food delivery
MORE often?
55
Source: Credit Suisse survey
The Cost of Convenience The Impact of Delivery Fees
“Free delivery” and “Special discounts” were the top factors that would drive increased delivery order intent, highlighting opportunities to increase utilization and customer acquisition
– 65% of customers indicated “free delivery” would incentivize them to order delivery more often
“Free delivery” was the number one way to incentivize consumers across every age group and delivery frequency level to order delivery more often
Potential Demand Drivers – “Free Delivery” Potential Delivery Demand Drivers - Average
Economics
Survey conducted among ~1,200 consumers in March 2019.
62%
67%
63%
67%71%
67%62%
53%
Never 1-2 times 3-4 times 5+ times 18-29 30-44 45-60 60+
Delivery Frequency Per Month Age
What would get you to eat restaurant food delivery
MORE often? - "Free Delivery"
-6%
7%
-4%
1%
11%
13%
6%
Nothing
LTOs available only for delivery
Favorite restaurant starts to offer delivery
More restaurant/cuisine options
Special discounts only for delivery
Loyalty points/rewards
Free delivery
% Respondents
What would get you to eat restaurant food delivery
MORE often (Age 18-29 vs Average)?
2%
25%
27%
33%
48%
54%
71%
Nothing
LTOs available only for delivery
Favorite restaurant starts to offer delivery
More restaurant/cuisine options
Special discounts only for delivery
Loyalty points/rewards
Free delivery
% Respondents
What would get you to eat restaurant food delivery
MORE often (Ages 18-29)?
56
Source: Credit Suisse survey
Appealing to Younger and Frequent Delivery Users Free Delivery & Loyalty/Rewards
Younger consumers are more receptive to free delivery and special discounts to drive
purchase behavior – 71% of consumers 18-29 years old indicated “free delivery” would incentivize them to order delivery MORE often vs 65% on average
Loyalty and rewards are more important to younger consumers – 54% of consumers 18-29 years old indicated “loyalty points/rewards” would increase delivery intent (vs 40% on average) – the greatest difference among all factors considered
– Delivery growth should unlock increased digital utilization, especially among younger consumers
Potential Delivery Demand Drivers – Ages 18-29 vs Average Potential Delivery Demand Drivers – Ages 18-29
Economics
Survey conducted among ~1,200 consumers in March 2019.
57
Source: Uber Eats, Credit Suisse estimates
Who Owns the Data? Restaurants vs Third-Party Platforms
Third-party platforms own the customer data through their platforms – NOT the restaurants,
underscoring the importance for restaurants to integrate delivery through their own
branded websites/apps
Data is arguably the most important element of increased digital utilization (including delivery) to better forecast demand, personalize offers, segment customers and influence behavior
Most significant risk: third-party platforms use the rich customer data to launch their own food offerings based on demand & trends
– Increasing availability of turnkey solutions (virtual & ghost kitchens), reducing capital requirements and barriers to entry
Data
When searching “McDonald’s” in Uber Eats, the pop-up shop was the first option
Uber Eats selectively offers food
through pop-up shops in the form of virtual kitchens
58
Source: Kitchen United website, Cloud Kitchens website, Credit Suisse estimates
Increasing Competition Virtual Kitchens Launch of virtual and ghost kitchens lowers the barriers to entry by reducing upfront capital
requirements and ability to leverage shared services
Emerging virtual kitchen competitors have targeted aggressive growth potential
– Kitchen United has identified opportunities to build out 400 Virtual Kitchen Centers & install 5K kitchens across the US, including 18 centers & 13 new markets in 2019
Strong management team, many with former restaurant operator backgrounds
– Cloud Kitchens has multiple locations with expectations for additional expansion
Founder & CEO is former Uber CEO Travis Kalanick
Competition
Cloud Kitchens Benefits: Lower Costs & Faster Expansion Kitchen United Expected Openings – Virtual Kitchen Centers
59
Source: Grubhub Transcript, Credit Suisse estimates
Opportunity Cost of Shifting Customers to Third-Party Platforms As restaurants partner with third-party providers and encourage customers to order through the
platforms, they are also shifting their own customers
– Introduces customers to competitors on the platform
– Lose access to valuable customer data
– Platforms don’t necessarily have restaurants’ best interest in mind
– Delivery provider is last customer touchpoint, and could have implications for quality of food delivered and overall experience
In February/March 2019, Taco Bell and Grubhub launched a co-branded marketing campaign, increasing awareness of delivery availability & the platform
– The campaign generated an incremental ~100-150bps to GRUB’s daily average orders in the quarter, which we estimate equates to ~$12-15MM for Taco Bell sales in the quarter
“Diners that place their first order with Taco Bell during the free delivery period are returning to Grubhub at the same or better rates as a typical diner even after we ended the free delivery campaign. Some come back and order Taco Bell again, but the majority are trying other restaurants on the platform as well.” – Matthew Maloney, GRUB Founder, CEO & Director, April 2019
Third-Party Delivery Platforms
60
Source: comScore, Credit Suisse estimates
Third-Party Platforms Can Be Complementary
Restaurants can enter customer consideration sets and increase awareness of delivery availability with platform presence
Based on commentary from restaurant companies, presence across multiple platforms is also complementary
Third-Party Delivery Platforms
Burger Restaurants & Delivery Platforms Overlap
Pizza Restaurants & Delivery Platforms Overlap
There is relatively limited overlap between users of the largest delivery platforms and the largest pizza chains, suggesting
opportunity for pizza chains to benefit from incrementality on platforms
*Read starting from left column. Example: 21% of Uber Eats users engage with Domino’s digitally, 16% of Uber
Eats users use Pizza Hut and 10% of Uber Eats users also use Papa John’s.
There is relatively limited overlap between users of the largest delivery platforms & the
largest burger chains, suggesting opportunity for burger chains to benefit from
incrementality on platforms
McDonald's Burger King Wendy's Sonic Jack in the Box
Uber Eats 20% 6% 7% 5% 1%
Grubhub 18% 6% 4% 3% 1%
DoorDash 18% 6% 6% 4% 2%
Postmates 21% 6% 7% 3% 2%
Domino's Pizza Hut Papa John's
Uber Eats 21% 16% 10%
Grubhub 17% 12% 8%
DoorDash 17% 12% 9%
Postmates 21% 14% 9%
*Read starting from left column. Example: 20% of Uber Eats users engage with McDonald’s digitally, 6% of
DoorDash users use Wendy’s digitally.
61
Source: McDonald’s (delivery order in NYC February 2019), Starbucks (delivery order in NYC March 2019), Credit Suisse
Quality Control in Delivery
Certain cuisines may not travel well, which could impact the experience for the customer
Transport of food by third party could have food safety implications
Many restaurant companies appear to be exploring different packaging for delivery to maintain the order’s integrity and enhance the quality of food delivered (i.e. separate packaging for hot/cold items)
Quality
Starbucks Delivery Packaging – March 2019 McDonald’s Delivery Packaging – February 2019
McDonald’s uses separate drink packaging to prevent spillage & adhesive to protect the order’s integrity
Starbucks also uses an adhesive to maintain the order’s integrity
62
Source: Chipotle presentation, Credit Suisse
Delivery Channel Increases Operational Complexity
Addition of new ordering channels increases restaurant complexity
– Lack of POS integration creates inefficiencies
Many restaurants require multiple tablets to key in orders if lacking POS integration
– Could result in slower service times for in-store customers
Requires changes in both back & front of house layouts to address potentially increased congestion and capacity requirements
Restaurants adding designated pickup areas for digital/delivery orders, modifying back of house and front of house layouts and considering digital/delivery channels in future prototypes
Operations
Chipotle Digitized Second Make-Lines Chipotle Pickup Shelves for Digital Orders
Chipotle is rolling out digital pick-up shelves and digitized second production lines to optimize its increasing digital sales mix
63
Competing for Delivery Drivers, Not Just Sales Working with multiple platforms – Many delivery drivers are agnostic to the third-party delivery
company they are working for and often work with multiple platforms
– This could have implications on the experience if delivery drivers work with multiple platforms at the same time to maximize delivery orders
Incentive alignment – Delivery drivers work as contractors for third-party platforms and have access to a variety of third-party platforms, so incentives & ownership mentality might suffer
– Delivery drivers working for platforms are focused on maximizing delivery orders and could lead to poor service (i.e. might wait in trade area to collect multiple delivery orders vs delivering one at a time for best quality)
Selecting partners – Third-party platforms’ networks of delivery drivers should be a key consideration in partnerships since there may not be sufficient capacity for delivery drivers even if demand exists
Who faces the greatest risk? Pizza chains with delivery infrastructures face the greatest risk in the competition for delivery drivers, and platform presence might be the only way to offset potential sales losses if the restaurants’ delivery driver network cannot handle the delivery capacity
– Pizza Hut – partnering with Grubhub, with presence on the platform and Pizza Hut delivery network completing the last mile
– Papa John’s – partnering with DoorDash, with the orders coming through the platform and DoorDash also completing the delivery
– Domino’s – has dismissed the idea of a national partnership with third party platforms (though some franchisees have presence for order aggregation)
Source: Company data, Credit Suisse
Delivery Drivers
64
Exposure to Delivery
Source: Company data, FactSet, Credit Suisse estimates
Domino’s (DPZ)
• Best-in-class delivery infrastructure with high-level execution supportive of
delivery share gains long-term
Chipotle (CMG)
• Only large restaurant company to integrate delivery in its app; food travels well;
second production lines to execute digital orders optimizes operations
Shake Shack (SHAK)
• Prudent approach to delivery to optimize operations and quality of food delivered;
based on industry contacts, Shake Shack generates significant traction on platforms where available
McDonald’s (MCD)
• Delivery still in early stages, with opportunities for multiple partnerships and
marketing support as upside
65
Digital
Volume Increases ~20-30%
Delivery
66
Digital Supports Incremental Sales Volumes Adding Convenience Not Seen Since The Drive-Thru
Source: Credit Suisse estimates
AUV*
Traditional
QSR
Drive-Thru
~50-70%
Sales Mix
Mobile Order
Drive-Thru
~20%
Sales Mix
Drive-thru orders tend to generate higher avg tickets relative to in-store orders (multiple people in car)
Digital channels support an additional layer of sales & orders generally 1.5-2x higher than an in-store order (multiple people on order; suggestive sell; more time to browse)
Volume Increases ~10-15%
*Average unit volume
67
Technology Can Unlock Capacity Every 6 seconds saved at drive-thru = 1% in sales per former McDonald’s CEOs Jack Greenberg & Don Thompson
Source: Company data, Credit Suisse estimates
Deploying technology
to increase efficiency
of operations
Shift customers from
the drive-thru to
digital channels
Generate digital sales
at underutilized
dayparts
Digital menu boards, system integration, customer recognition
Add second production lines to execute digital orders
Digital orders allow for better planning; delivery transactions tend to come in after 4PM & weekends
68
Technology Comes At A Cost Corporate Level
Source: Company data, Credit Suisse estimates
Technology is a perpetual cost restaurants must incur to maintain their digital ecosystems
All companies across all restaurant segments are increasing investments in digital and the majority are partnering with third-party aggregators for delivery
Select companies are also making big investments in outside firms as they seek to gain a competitive advantage against peers (accelerate digital innovation, access to talent, etc.)
February 2018: $200MM in Grubhub July 2018: Acquires license for CardFree to accelerate digital development December 2018: Acquires QuikOrder for $77MM February 2019: $25MM digital investment, including $15MM for Accenture partnership March 2019: $100MM investment in Venture Fund that invests in food & retail startups March 2019: $300MM to acquire Dynamic Yield startup & $5MM investment in Plexure
69
Technology Comes At A Cost Restaurant Level
Source: Company data, Credit Suisse estimates
Infrastructure, Equipment & Software – Back of house/front of house technology and equipment, maintenance fees, support, etc. (annual & one time fees)
Technology/Digital Transaction Fees – Franchisees generally pay fees on every digital order
Credit Card Processing Fees – Digital orders generally transacted with credit/debit cards
Mobile offers and loyalty programs – Many restaurant companies are offering mobile-specific deals to encourage utilization and loyalty programs, with both discounts at the cost of the restaurants
Delivery Fees – Incremental costs: 1) commission costs for third-party delivery (commissions average ~15-30% of average ticket); 2) proprietary delivery infrastructure
70
Source: Euromonitor, Olo, PitchBook, Credit Suisse estimates
Digital Sales Utilization Continues to Expand
Digital represents ~7% of overall US restaurant sales currently, and we expect it to increase to ~25% of sales longer-term (including delivery)
Growth of online ordering platforms and third-party delivery providers and increasing digital investments from restaurants gives us confidence in ongoing digital growth
Restaurant Delivery & Ordering Platform Deals Digital as % of Sales
2% 2%4%
6%7%
25%
0%
5%
10%
15%
20%
25%
30%
2014 2015 2016 2017 2018 Long-
Term
Dig
ital as
% o
f S
ale
s
0
10
20
30
40
50
60
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
# D
eliv
ery
/Ord
ering P
latf
orm
Deals
71
Source: Sensor Tower, Credit Suisse estimates
Emergence of food-related apps/platforms signals greater adoption
As restaurants recognize the benefits of digital and continued consumer shift towards online channels, we expect digital utilization to continue to grow
Complementary apps to the restaurant industry, such as Uber Eats and Open Table, make up ~20% of the top 25 most downloaded food & drink apps, supporting channel & overall food market growth
0
200
400
600
800
1,000
1,200
1,400
Uber
Eats
McD
onald
's
DoorD
ash
Sta
rbuck
s
Chic
k-f
il-A
Gru
bhub
Dom
ino's
Post
mate
s
Burg
er
Kin
g
Dunkin
'
Pizza
Hut
Subw
ay
Tast
y
Sonic
Wendy’
sP
anera
7-E
leve
n
Inst
aca
rt
OpenTable
Papa J
ohn's
Taco
Bell
Chip
otle
Litt
le C
aesa
rs
Am
azo
n P
rim
e N
ow
Bla
zin' R
ew
ard
s
# D
ow
nlo
ads
in 2
018 (
MM
)
Restaurant App Complementary App Competitor App
Improvement in Food & Drink Category Ranking 2018 vs 2017 Food & Drink Category Top 25 Apps by Downloads in 2018
-10
-5
0
5
10
15
20
25
Uber
Eats
McD
onald
's
DoorD
ash
Sta
rbuck
s
Chic
k-f
il-A
Gru
bhub
Dom
ino's
Post
mate
s
Burg
er
Kin
g
Dunkin
'
Pizza
Hut
Subw
ay
Tast
y
Sonic
Wendy’
s
Panera
7-E
leve
n
Inst
aca
rt
OpenTable
Papa J
ohn's
Taco
Bell
Chip
otle
Litt
le C
aesa
rs
Am
azo
n P
rim
e N
ow
Bla
zin' R
ew
ard
s
Impro
vem
ent
in R
ank 2
018 v
s 2017
72
Source: Euromonitor, Olo, Credit Suisse estimates
Enhancing Convenience to Reap the Benefits
Digital Order
$12.50
In-Store Order
$10.00
~1.25x
With ~50% of restaurant sales consumed off-premise, there is significant runway to grow digital transactions
Average checks are generally ~20-30% higher on digital transactions (i.e. more time to review the menu; suggestive sell)
In-store vs Digital Average Checks Off-Premise Sales
50%
3% 6%
24%
20%
Delivery excl.
Pizza
Delivery Drive-Thru Takeout Transactions
consumed off-
premise
73
Source: Company data, Credit Suisse estimates
“Digital IQ” Varies Across Segments & Brands
• Domino’s: digital represents
65%+ of sales, with potential to reach nearly 100%
• Pizza Hut: digital represents ~50% of sales (~55% of delivery and carryout only)
• Papa John’s: digital represents 60%+ of sales, including ~2/3 through mobile
Pizza
• Starbucks: mobile order & pay
~15% of transactions; mobile payment ~35% of transactions & loyalty members represent ~41% of US company sales
• Dunkin’: mobile order & pay represents ~4% of transactions; loyalty members represent ~12% of sales
Coffee
• McDonald’s: mobile order & pay available nationwide
• Burger King: mobile order & pay available nationwide
• Wendy’s: rolling out mobile order & pay by end of 2019
• Jack in the Box: recently launched digital app
• Taco Bell: digital represents <10% of sales
• Subway: mobile represents ~10% of sales
• Chick-fil-A: digital represents ~15% of sales
• KFC: working on a digital app
• Popeyes: rolling out standardized POS system; recently rolled out digital app
Burgers/QSR Peers
• Chipotle: digital represents ~16% of sales
• Shake Shack: continues to invest in digital and drive higher digital sales mix
Fast Casual
74
Source: Credit Suisse survey
Loyalty/Rewards Could Unlock Digital Utilization
A “loyalty/rewards program” was the number one factor respondents identified to increase mobile order and pay intent, highlighting an opportunity to unlock digital utilization
Loyalty/rewards programs growing in importance – from our surveys conducted in March 2019 to July 2018, more consumers indicated a loyalty/rewards program would influence them to use mobile order & pay more often (55% of consumers in March 2019 vs 43% in July 2018)
Potential Mobile Order & Pay Demand Drivers – Loyalty/Rewards Potential Mobile Order & Pay Demand Drivers
Survey conducted among ~1,200 consumers in March 2019 & ~1,200 consumers in July 2018.
13%
23%
29%
29%
37%
40%
45%
55%
Nothing
LTOs available only via mobile ordering
Separate section in restaurant for pick up
Favorite restaurant starts to offer MOP
Able to save past orders
Curbside pickup option
Special mobile only discounts
Loyalty/rewards program
% Respondents
25%
23%
29%
31%
33%
38%
38%
43%
13%
23%
29%
29%
37%
40%
45%
55%
Nothing
LTOs available only via mobile ordering
Separate section in restaurant for pick up
Favorite restaurant starts to offer MOP
Able to save past orders
Curbside pickup option
Special mobile only discounts
Loyalty/rewards program
% Respondents March 2019 July 2018
8%
31%
31%
31%
36%
46%
50%
61%
Nothing
Separate section in restaurant for pick up
Favorite restaurant starts to offer MOP
LTOs available only via mobile ordering
Curbside pickup option
Able to save past orders
Special mobile only discounts
Loyalty/rewards program
% Respondents
What would get you to use mobile order & pay
MORE often? (Age 18-29)
75
Source: Credit Suisse survey
Loyalty/Rewards Program Even More Important to Younger Digital Users Younger consumers appear more receptive to loyalty/rewards to drive mobile order & pay intent
– ~60% of consumers age 18-29 indicated a “loyalty/rewards program” would incentivize them to order mobile order & pay MORE often vs 43% on average – the greatest difference among all factors considered
– We view a loyalty/rewards program as a tool to unlock digital utilization, especially among younger consumers Potential Mobile Order & Pay Demand Drivers – Age 18-29 vs Average Potential Mobile Order & Pay Demand Drivers – Age 18-29
-5%
2%
1%
8%
-4%
9%
6%
6%
Nothing
Separate section in restaurant for pick up
Favorite restaurant starts to offer MOP
LTOs available only via mobile ordering
Curbside pickup option
Able to save past orders
Special mobile only discounts
Loyalty/rewards program
% Respondents
What would get you to use mobile order & pay
MORE often? (Age 18-29 vs Average)
Survey conducted among ~1,200 consumers in March 2019.
76
Source: Domino’s website, Starbucks app, Company data, Credit Suisse estimates
What Makes a Successful Loyalty Program? Data, Data and More Data Customer View: We believe the most successful loyalty programs are simple, easy to understand
and are frictionless at sign up
Restaurant View: A loyalty program is a tool to capture customer data to use for personalization and segmentation to drive increased spending – but must be used as part of an omni-channel strategy
Types of Loyalty Programs
Frequency-based – reward customers based on transactions (example: Domino’s)
Spend-based – reward customers based on dollars spent (examples: Starbucks, Dunkin’, Chipotle, Pizza Hut, Papa John’s)
Surprise & Delight – reward customers spontaneously (example: Panera)
Starbucks Domino’s
Spend Based Rewards Program Frequency-based Rewards Program
77
Company Highlight Domino’s
Source: Company data, Credit Suisse estimates
Domino’s competitive advantage is driven by how the company captures and leverages customer data to inform strategic decisions (suggested sell, personalized marketing, new unit development, etc.) – Digital makes up ~65% of Domino’s orders, relatively in-line with pizza peers
The Piece of the Pie loyalty program has been a meaningful contributor to SSS (20MM+ members) – The Points for Pies campaign (reward loyalty points for any pizza) shows the company’s innovative
approach to increase digital utilization, loyalty program growth and capture competitive information
Mobile:
50%+
Mobile:
~75%
Mobile:
65-70%
~65%
~50%+
60%+
Domino's Pizza Hut Papa John's
Digital Sales Mix
The 3 largest pizza chains all have digital utilization
rates of 50%+, highlighting the way a company
leverages customer data is the competitive
advantage – not digital utilization alone
Domino’s uses suggestive sell at multiple points during the order
process, which has generated healthy avg check growth
Innovation around the loyalty program
highlights an opportunity to grow the program and capture more info
78
Company Highlight Starbucks
Source: Company data, Credit Suisse estimates
Best-in-class digital ecosystem with evolving capabilities, suggestive sell, digital relationships with non-reward members and strong personalized marketing (15% mobile order & pay; 35% mobile; 41% loyalty program)
– Ability to leverage customer data to make strategic decisions & influence behavior is and will remain the company’s competitive advantage
Starbucks has ~17MM members in the Starbucks Rewards program representing ~40%+ of US company sales & nearly all of SSS growth
The Starbucks Rewards program comprises
~17MM members with growth of 15%+ over the last five years
Starbucks is expanding digital relationships outside of Starbucks Rewards, with the goal to convert to
members over time; Loyalty members exhibit higher frequency and spend relative to non-members
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
4
6
8
10
12
14
16
18
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
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
1Q
19
2Q
19
MS
R M
em
ber
YO
Y G
row
th %
MS
R M
em
bers
(M
M)
MSR Members (MM) YOY %
~11MM ~13MM ~14MM ~16MM
~13MM
Dec 2015 Dec 2016 Dec 2017 Dec 2018
My Starbucks
Rewards Members
New Digital
Relationships
Digital
Opportunity
79
Company Highlight McDonald’s
Source: Company data, Credit Suisse estimates
Transforming Today’s Drive-Thru
Recent acquisition of Dynamic Yield suggests greater focus on digital innovation through increased personalization and use of decision logic technology
Near-term, McDonald’s is rolling out digital menu boards across the US system with the ability to suggest offers by time of day, weather & trending menu items
Long-term, machine learning will allow McDonald’s to increase personalization and tailor suggestions real-time based on in-restaurant traffic
– Technology will work across the digital ecosystem, including self-order kiosks, global mobile app and outdoor digital menu boards
– Opportunities for enhanced drive-thru experiences such as the recognition of customer license plates to suggest previous orders and other items, which could reduce service times, increase accuracy and improve convenience
Habitual Breakfast Positive For Digital Use
With a ~25% breakfast sales mix, McDonald’s is well positioned for digital utilization given breakfast is a more habitual occasion; the & current loyalty platform is for McCafé beverages
80
Company Highlight Chipotle
Source: Chipotle presentation, Company data, Credit Suisse estimates
Chipotle has doubled its digital utilization in just two years, with mobile order & pay and delivery now representing ~15% of sales (total out of restaurant sales incl. catering ~16%)
Operations are well suited for an omni-channel strategy, with secondary production lines executing out of restaurant sales (digitized second make-lines), “smarter pickup times” technology for visibility into order processing and in-store pickup shelves for digital orders
– Digital orders are more margin-accretive than in-store orders
Chipotle is the only large restaurant chain with delivery integrated in the app, supporting better economics and best leveraging aggregator partnerships for incremental sales through platform presence
6%
8%
10%
12%
14%
16%
18%
1Q
17
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
1Q
19
20
16
20
17
20
18
Dig
ital as
% o
f S
ale
s
Note: Represents “out of restaurant” sales which includes ~1% from catering.
Digitized secondary production
lines fulfill out of restaurant orders (primarily digital sales), unlocking capacity and limiting operational disruptions
In-store pickup shelves for out-of-store orders enhance the digital ordering experience and reduce friction
81
Company Highlight Shake Shack
Source: Shake Shack (delivery in NYC April 2019), Shake Shack presentation, Company data, Credit Suisse
Digital/delivery more meaningful contribution to sales
– Opportunity to fulfill demand for new customers & incremental occasions (i.e. customers who might otherwise not want to wait on line)
Long-term and prudent approach to delivery, as the company is testing different partners, investing in packaging, integrating POS systems, etc.
– Near-term, this strategy fails to leverage the brand’s strength with partners and company incurs higher costs (national partnerships offer more favorable delivery commissions, particularly with greater exclusivity)
Shake Shack is investing in delivery packaging to protect the integrity and quality of the order
Shake Shack is testing kiosks in select locations, which could also help offset labor costs
82
Source: Credit Suisse estimates
Credit Suisse Digital Framework
Mobile Order
& PayDelivery
In-restaurant
technological
investments
Delivery
Integrated in
App
Focus on
collecting
customer
data
Suggestive
Sell
Personalized
Marketing
Table Stakes Competitive AdvantageLong-Term Digital Strategy
Relative ranking based on
digital strategy within respective segment
83
M&A
84
Source: Credit Suisse estimates
Active Restaurant Deal Space
Restaurants deal space has been active over the last couple of years:
– Well-funded firms have recognized the synergies owning multiple brands and a larger base of restaurants
– Access to cheap capital
– Greater consolidation among franchisees
– Increase in shareholder activism
– Potentially a safe-haven for long-term capital with restaurants largely insulated from seismic changes in retail
85
Source: Company data, Media reports, Credit Suisse estimates
Select M&A Restaurant Deals Date Acquirer Target Deal Size ($MM) LTM EV/EBITDA
QSR/Fast Casual
2018 Durational Capital / The Jordan Company Bojangles' $715 9.9x
2018 Roark Capital/Inspire Brands Sonic Drive-In $2,300 15.7x
2018 CAVA Group Zoe's Kitchen $300 16.4x
2018 The Coca-Cola Company Costa $5,100 16.4x
2018 Butterfly Equity Modern Market
2018 Spice Private Equity Bravo Brio $100 3.8x
2017 Apollo Global Management, LLC Qdoba $305.0 5.9x
2017 JAB Panera $7,500 18.3x
2017 QSR Popeyes $1,800 20.8x
2016 JAB Krispy Kreme $1,340 18.3x
2014 Burger King Worldwide Inc./QSR Tim Hortons $11,900 14.6x
2014 JAB Einstein Noah Restaurant Group Inc $465 9.9x
2013 Roark Capital CKE Restaurants, Inc. $1,640 - $1,750
2012 JAB Caribou Coffee Company $311 11.5x
2012 Starbucks Teavana $620 17.3x
2012 JAB Peets Coffee & Tea, Inc. $949 21.0x
2011 Roark Capital/Inspire Brands Arby's Restaurants - Sub of Wendy's $430 9.0x
2010 3G Capital Burger King Holdings, Inc. $4,000 9.0x
2010 Mill Road Capital Rubio's Restaurant $83 6.3x
2010 Apollo Global Management CKE Restaurants, Inc. $1,005 6.0x
Casual Dining
2018 TriArtisan Capital Partners and Paulson & Co. P.F. Chang's Inc. $700
2018 Del Frisco's Barteca $362 17.6x
2018 Rhône Capital Fogo de Chão $560 10.2x
2018 Roark Capital/Arby's Restaurant Group Buffalo Wild Wings $2,900 10.3x
2017 NRD Capital Ruby Tuesday $335 7.9x
2017 Darden Cheddar's $780 10.4x
2017 Golden Gate Capital Bob Evans Farms $610 15.4x
2014 Sentinel Capital Partners TGI Fridays $800
2014 Golden Gate Private Equity Red Lobster/Darden $2,100 9.0x
2014 Apollo Global Management CEC Entertainment $1,300 7.7x
2012 Darden Yard House $585 14.2x
2012 Centerbridge Partners PF Chang's $1,124 8.6x
2011 Golden Gate Capital California Pizza Kitchen (CPK) $470 6.6x
86
Potential M&A Target Dunkin’ Brands (DNKN) DNKN has been discussed as a potential acquisition target for several years given its attractive
business model and growth opportunities
Potential Scenarios include:
JAB Holding – most frequently cited potential acquirer given its growing portfolio of coffee and bakery businesses and media reports on previous discussions between the two parties
– DNKN could be a good fit for JAB’s global coffee portfolio, but we believe DNKN’s CPG business could be a major hurdle for the deal (relationship with J.M. Smucker and profit sharing agreement with franchisees)
Roark Capital/Inspire Brands – seeking to grow its portfolio of restaurant brands and DNKN could be complementary with limited competitive overlap to existing brands
Private Equity Consortium – conglomerate of PE firms could partner in deal; similar to 2006 DNKN acquisition by Bain Capital/Carlyle Group/Thomas H. Lee Partners
3G/Restaurant Brands International – 100% franchised business model and global presence could fit well in RBI portfolio; significant competitive overlap with Tim Hortons
Coca-Cola – potential for company to enter coffee market given recent acquisition of Costa, but has strong relationship with McDonald’s
PepsiCo – could consider bid into coffee market, but has strong partnership with Starbucks
Nestlé – company involved in coffee market, but has strong partnership with Starbucks
87
Potential M&A Target Papa John’s (PZZA)
PZZA has been discussed as a potential acquisition target for several years, which was amplified following reports PZZA was seeking a buyer given challenges following negative publicity and resulting sales declines
– At a market cap of ~$1.5BN, deal would likely be attainable for a large number of buyers
Potential Scenarios include:
Restaurant Brands International – complementary fit (pizza segment, heavily franchised, global presence); RBI could leverage PZZA’s digital/delivery infrastructure and has experience with integrating brands and operating commissaries/distribution centers; PZZA could benefit from economies of scale and international network
Yum! Brands – Papa John’s has significant overlap with Pizza Hut, so not an obvious complement to YUM’s portfolio; PZZA’s franchised mix is below YUM’s target and PZZA operates distribution centers
Wendy’s – press reports stated Wendy’s was in preliminary discussions with Papa John’s regarding a merger, but talks cooled
Roark Capital/Inspire Brands - seeking to grow its portfolio of restaurant brands & PZZA could be complementary with limited competitive overlap to existing brands; relatively small market cap aligns with size of current portfolio
John Schnatter – founder and former CEO owns ~18% of PZZA; previous reports indicated Schnatter was seeking to partner with PE firms as a takeover (has since reduced his stake)
Private Equity – Given PZZA’s relatively small market cap, makes deal attainable for a number of well capitalized buyers
88
Potential M&A Target Jack in the Box (JACK)
JACK was seeking a range of strategic and financing alternatives, including a sale of the company
– At a market cap of ~$2BN and with ~$1BN of debt, JACK is relatively small and likely attainable for a number of potential buyers
Potential Scenarios include:
Yum! Brands – JACK could be complementary as a burger concept with limited competitive overlap in the existing portfolio and ~95% franchised mix; JACK could benefit from YUM’s economies of scale and development expertise
Restaurant Brands International – Jack in the Box faces significant overlap with Burger King, so not an obvious complement to RBI’s portfolio; ~95% franchised, but geographically concentrated and lacks international presence
Roark Capital/Inspire Brands – seeking to grow its portfolio of restaurant brands; Sonic and Jack in the Box have competitive overlap, but could generate synergies from competing brands and there are differences between the two geographically concentrated burger concepts
Apollo – purchased Qdoba in a deal closed March 2018; working relationship through transition and possible JACK could tap Apollo as part of its process in seeking strategic and financing alternatives
Private Equity – given JACK’s relatively small market cap, makes a deal attainable for a number of well capitalized buyers
89
Potential M&A Acquirer Restaurant Brands International (QSR)
QSR has history of M&A and has indicated it will be opportunistic with M&A
– At ~5x levered currently and the company delevers ~0.5x per year naturally, QSR likely has room to lever up (has gone up to ~7x in the past)
– We believe QSR seeks brands with a long history and significant runway for LT global growth
Potential Targets include:
Papa John’s – complementary fit (pizza segment, heavily franchised, global presence); QSR could leverage PZZA’s digital/delivery infrastructure and has experience with integrating brands and operating commissaries/distribution centers; PZZA could benefit from economies of scale and international network
Domino’s – press reports have cited Domino’s as a potential target of QSR, as DPZ’s international master franchisees and industry-leading digital/delivery capabilities could be complementary to QSR; but DPZ has high leverage, trades at a rich valuation and no obvious G&A opportunities
Little Caesars – third largest pizza chain in the US with ~$4BN in system sales and ~4,350 units in the US and ~1,000+ locations internationally
Dunkin’ –DNKN’s 100% franchised business model and global presence could fit well in RBI portfolio; significant competitive overlap with Tim Hortons
Wingstop – WING is ~98% franchised and at a ~$2BN market cap, likely attainable; WING’s chicken-based menu overlaps with Popeyes, so may not be as complementary
Taco Bell – QSR could view Taco Bell as attractive, which would be complementary to QSR’s existing portfolio
90
Unit Growth
25%
26%
27%
28%
29%
30%
31%
32%
33%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
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
20
17
20
18
Top 5
00 a
s %
of
Indust
ry U
nits
Top 5
00 C
hain
s U
nit
Gro
wth
Top 500 Chains Unit Growth Top 500 as % of Industry Units
91
Source: Technomic, Credit Suisse estimates
US restaurant growth moderating, with large chains gaining share
Restaurant industry growth has averaged ~0.5% over the last 15 years, with limited service restaurants (QSRs and fast casual) outpacing full service restaurants
Large chains are gaining share, with the largest 500 restaurant chains exhibiting average growth of ~2% over the last 15 years representing ~33% of industry units
Unit growth has decelerated, with 2018’s 0.7% unit growth among the largest 500 chains the lowest in eight years
Top 500 Restaurants Unit Growth Restaurant Industry Unit Growth
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
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
20
17
20
18
Rest
aura
nt
Indust
ry U
nit
Gro
wth
Total Restaurants Limited Service Restaurants Full Service Restaurants
92
Source: Technomic, Credit Suisse estimates
US unit growth decelerating across all major segments
Slowing expansion among the top 500 restaurant chains highlights importance of driving growth within existing base
– Unit growth contributed ~20% to sales growth in 2018, the lowest in the history of our data set
Among the top 500 chains, all segments are demonstrating decelerating unit growth, with 2018 unit growth below the 5-yr average
Top 500 Restaurants Unit Growth by Segment Top 500 Restaurants Sales Growth (Unit Growth + SSS & Other)
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
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
20
17
20
18S
ale
s G
row
th -
Top 5
00 R
est
aura
nts
Unit Growth SSS & Other
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Burgers Pizza Coffee Chicken Mexican
Unti
Gro
wth
-Top 5
00 R
est
aura
nts
5-yr Avg Unit Growth 2018 Unit Growth
93
Source: Technomic, Credit Suisse estimates
Mixed Unit Growth Dynamics Across Cuisine Segments
Segment leaders are largely gaining share as they outpace unit growth relative to other large chains in the segment
– Domino’s, Starbucks, Chick-fil-A & Taco Bell demonstrated higher unit growth relative to other large chains
But the 5 largest chains are not necessarily gaining share collectively
– Pizza Hut and KFC have offset pizza and chicken segment growth, respectively, with net closures
2018 Unit Growth – Top 5 Chains & Top 500 Chains in Segment 2018 Unit Growth – Segment Leader & Top 500 Chains in Segment
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Burgers Pizza Coffee Chicken Mexican
2018 U
nit
Gro
wth
Top 5 Chains in Segment Top 500 Chains in Segment
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
McDonald's Domino's Starbucks Chick-fil-A Taco Bell
Burgers Pizza Coffee Chicken Mexican
2018 U
nit
Gro
wth
Segment Sales Leader Top 500 Chains in Segment
94
Source: Technomic, Credit Suisse estimates
Assessing Segment Dynamics – Room For Growth vs Market Share Battle
Burgers are the largest and most penetrated category, with ~$85BN of sales
– Large chains (35 concepts) comprise 95%+ of segment sales (top 5 ~80% of sales)
Pizza’s ~$43BN segment is highly fragmented, with the five largest chains making up <50% of segment sales, highlighting room for market share gains among the large chains
Coffee, Chicken and Mexican Restaurant segments are relatively small and attractive categories, reflecting mid- to high-single-digit growth
5-yr Sales CAGR by Segment Market Share by Segment
$66BN
$19BN$30BN
$18BN $21BN $18BN
$82BN
$26BN
$31BN
$24BN$27BN
$20BN
$85BN
$43BN
$33BN $31BN $29BN$24BN
Burgers Pizza Coffee Sandwich Chicken Mexican
Small Chains &
Independents
Top 500 Chains
Top 5 Chains
2.7%
4.3%
7.5%
2.0%
8.0%
6.4%
2.6%
4.1%
7.9%
1.8%
8.4%
6.3%
Burgers Pizza Coffee Sandwich Chicken Mexican
Total Segment Large Chains in Segment
95
Source: Technomic, Credit Suisse estimates
Unit Growth Highest Among Less Penetrated Segments (Coffee, Mexican and Chicken)
The burger segment has ~49K units, with ~90% units concentrated with the larger chains
– Burger segment is already very penetrated, with unit growth likely more difficult than other segments
The pizza segment is one of the largest, with relatively low unit growth – expansion is largely a market share battle
– Pizza segment is also the most fragmented, with opportunities for chains to grow at the expense of small chains & independents
Coffee, Mexican Restaurants and Chicken segments are the smallest by units and growing the fastest
5-yr Unit CAGR by Segment Units by Segment
33.6K
22.3K32.9K
25.5K
11.1K 10.5K
39.2K
30.4K
44.4K
26.5K
13.4K 15.3K
64.0K 62.0K
48.7K
38.5K
25.4K
19.2K
Sandwich Pizza Burgers Coffee Mexican Chicken
Small Chains &
Independents
Top 500 Chains
Top 5 Chains
0.4% 0.5%0.7%
3.9%
2.4%
3.0%
0.4%
1.2%0.8%
4.9%
3.6%3.3%
Sandwich Pizza Burgers Coffee Mexican Chicken
Total Segment Large Chains in Segment
96
Source: Technomic, Thinknum, Credit Suisse estimates
Burger Segment Sales Share
Burger Segment Unit Overlap
The burger segment is the most concentrated
segment in the restaurant industry, with the top 5 mature burger players generating 78% of segment sales and the largest chains (35 brands) making up 97% of segment sales
Given significant concentration, notable
geographic overlap leading to an already saturated market, and limited unit growth among the mature names in recent years, we expect burger segment unit growth to remain approx. flat, with a focus on market share gains Note: Read starting from left column. Within a 3 mile radius, 77% of
McDonald’s store base competes with Burger King. For comparison,
95% of Burger King’s store base competes with McDonald’s.
Burger Segment Most Concentrated
78%
71%
90%
79%
72%
64%
59%
65%
45%
97%
92%
92%
90%
84%
77%
75%
69%
60%
0% 20% 40% 60% 80% 100%
Burgers
Chicken
Coffee
Bakery Café
Mexican
Sandwich
Frozen Desserts
Asian/Noodle
Pizza
Sales Composition by Segment
Top 5 Chains Other Large Chains Small Chains & Independents
% Exposure to Select Burger Chains (3 miles)
McDonald's Burger King Wendy's Sonic Jack in the Box
McDonald's 69% 77% 72% 39% 24%
Burger King 95% 55% 76% 41% 22%
Wendy's 97% 84% 50% 44% 19%
Sonic 89% 70% 67% 39% 28%
Jack in the Box 98% 87% 76% 52% 75%
97% of Wendy’s store base competes with McDonald’s within a 3 mile radius
97
Source: Technomic, Credit Suisse estimates
Burger Segment Growth
Fast Casual Burgers vs QSR Burgers Unit Growth
Fast casual burgers generated outsized sales and unit growth relative to the overall burger segment in 2018
Fast Casual Burgers represent just 7% of units highlighting limited competitive impact, though do contribute a notable 65% to burger segment unit growth
Fast Casual Burgers Growing, But Still Limited Threat
12.2%
5.6%
2.4%
0.6%
2.7%
0.9%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Sales Growth Unit Growth
Fast Casual Burger Chains Top 500 Burger Chains Total Burger Segment
Fast casual burger
sales & unit growth
are outpacing the
overall segment
7%
65%
93%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% Units % Unit Growth Contribution
Fast Casual Burgers QSR Burgers
98
Source: Technomic, Thinknum, Credit Suisse estimates
Pizza Segment Sales Share
Pizza Segment Unit Overlap
Pizza Segment Most Fragmented
The pizza segment is the most fragmented segment across the industry, with <50% of sales generated by the largest five pizza chains
Overlap among the larger chains vary, with smaller independents likely representing a greater impact on pizza than other segments
78%
71%
90%
79%
72%
64%
59%
65%
45%
97%
92%
92%
90%
84%
77%
75%
69%
60%
0% 20% 40% 60% 80% 100%
Burgers
Chicken
Coffee
Bakery Café
Mexican
Sandwich
Frozen Desserts
Asian/Noodle
Pizza
Sales Composition by Segment
Top 5 Chains Other Large Chains Small Chains & Independents
Domino's Pizza Hut Papa John's
Domino's 35% 72% 61%
Pizza Hut 64% 42% 48%
Papa John's 90% 80% 28%
% Exposure to Select Pizza Chains (3 miles)
Note: Read starting from left column. Within a 3 mile radius, 72% of
Domino’s store base competes with Pizza Hut. For comparison, 64% of Pizza Hut’s store base competes with Domino’s.
90% of Papa John’s store base competes with Domino’s within a 3 mile radius
99
Source: Company data, Credit Suisse estimates
Delivery Not New In Pizza Segment
Delivery represented ~27% of QSR pizza segment sales in 2018, down from ~37% in 2002
Despite the emergence of complementary technologies that help smaller chains and independents compete in the digital & delivery space, we expect intra-segment trends to remain largely stable
– Economics of delivery will remain challenging and we expect larger scale players that have well established infrastructures will continue to gain share
– Top 3 competitors represent 56% of the US QSR pizza delivery segment, up from 46% in 2006
US QSR Pizza Delivery Segment Market Share US QSR Pizza Segment Channel Sales Composition
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
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
20
17
20
18
% Q
SR
Pizza
Segm
ent
Sale
s
Dine-In
Carry Out
Delivery
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
% Q
SR
Pizza
Deliv
ery
Share
Top 3 as % of Delivery Local & Independents
95%
77% 74%65% 61%
55% 55% 53% 52% 52% 51%
0%10%20%30%40%50%60%70%80%90%
100%
Jack
in t
he B
ox
Dunkin
'
Shake S
hack
Chip
otle
Sta
rbuck
s
RB
I
Papa J
ohn's
Wendy'
s
Dom
ino's
McD
onald
's
Yum
! B
rands
% o
f U
S U
nits
Top Market Top 3 Markets Top 5 Markets Top 10 Markets
63% 63% 62%60%
51%
43%40%
35%
13%
1% 0%0%
10%
20%
30%
40%
50%
60%
70%
McD
onald
's
Dom
ino's
Yum
! B
rands
RB
I
Sta
rbuck
s
Dunkin
' B
rands
Papa J
ohn's
Shake S
hack
Wendy'
s
Chip
otle
Jack
in t
he B
ox
Inte
rnatio
nal as
% o
f U
nits
100
Source: Company data, Franchise Disclosure Documents, Credit Suisse estimates
Concentration in Select States and Lack of International Presence Could Weigh on Growth Potential
Restaurants with greater geographic concentration face higher expansion risks in new markets given lower brand awareness, new market inefficiencies & increased exposure to challenges in these markets
Jack in the Box, Dunkin’ and Shake Shack have the highest US concentration risk, with >70% of their US portfolios concentrated in ten states (vs 63% average across our coverage)
Jack in the Box, Chipotle and Wendy’s have limited international exposure, with <15% of units outside of the US
International as % of Total Units US Unit Exposure
Note: (1) RBI (Restaurant Brands International) includes Burger King, Tim Hortons and
Popeyes; (2) Yum! Brands includes KFC, Taco Bell and Pizza Hut
101
Source: Company data, Credit Suisse estimates
International Supports Global Development Opportunity
Companies with an existing international presence are likely better positioned to execute against unit growth targets, with diversified unit growth reducing risk in specific markets
We have greater confidence in companies with master franchise partnerships, supporting increased visibility into the unit growth pipeline with well-capitalized franchisees
– Scale is important internationally as companies look to gain brand awareness and establish supply chains to enhance the economics
0%
10%
20%
30%
40%
50%
60%
70%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
YU
M
MC
D
QS
R
SB
UX
DP
Z
DN
KN
PZ
ZA
WE
N
SH
AK
CM
G
JA
CK
% Inte
rnatio
nal
# Inte
rnatio
nal U
nits
# International Units % International
International is
meaningful part of growth algorithm
102
Source: Company data, Consensus Metrix, FactSet, Credit Suisse estimates
Consensus Expectations Imply Accelerating Unit Growth Among Public Chains Consensus expectations imply global unit growth acceleration of 4%+ over the next four years, an
acceleration from 3.7% over the last four years
– Estimates also imply acceleration each year over the next four years
Unit growth supports the sector’s growth profile and premium valuation
– Restaurants with higher unit growth outlooks often receive premium valuations
Restaurant Valuations by Unit Growth Consensus Unit Growth Expectations – Public Restaurant Chains
3.5%
3.7%3.8% 3.8%
3.9%
4.1% 4.2%
4.3%
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%
4.4%
4.6%
20
15
20
16
20
17
20
18
20
19E
20
20E
20
21E
20
22E
% U
nit
Gro
wth
10.5x
15.0x
18.0x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
0-2% Unit Growth 2-6% Unit Growth 6%+ Unit Growth
NTM
EV
/EB
ITD
A
Unit Growth (FY19-FY21)
103
Source: Company data, Consensus Metrix, Credit Suisse estimates
Some Long-Term Unit Growth Targets Could Be Aggressive
Most companies have set long-term unit growth targets implying growth in-line or accelerating from recent history
Companies facing the highest execution risk are those that require acceleration from recent history and/or plan to largely expand into new markets
Consensus Estimates
5-yr Unit CAGR FY19E FY20E FY21E FY22E Long-Term Unit Growth Targets
McDonald's 1.3% 1.9% 2.1% 2.4% 2.0%
Restaurant Brands 4.9% 5.1% 5.7% 5.4% 5.9% 40K units over 8-10 years (implies 4.5-5.5% 8-10 yr CAGR)
Yum! Brands 3.1% 4.1% 4.1% 4.0% 4.1% ~4% per year
Wendy's 0.5% 1.5% 1.9% 2.3% 3.2% 1.5% in 2019 & 1.5-2.5% in 2020
Jack in the Box -0.1% 0.6% 1.0% 1.2% 1.4% Low-single digit unit growth
Domino's 7.9% 7.2% 6.9% 6.2% 6.3% 6-8% per year; 25K units by 2025 (implies 6.7% 7-yr CAGR)
Domestic 3.3% 4.5% 4.8% 4.1% 4.3% ~8,000 by 2025 (implies 4.5% 7-yr CAGR)
International 11.2% 8.8% 8.2% 7.4% 7.3% ~17,000 by 2025 (implies 7.8% 7-yr CAGR)
Papa John's 3.7% 2.7% 3.4% 2.4% 3.1%
Starbucks 8.2% 7.1% 6.9% 6.6% 6.4% 6-7% per year
Dunkin' Brands 2.9% 1.3% 1.5% 1.6% 2.0%
Dunkin' US 4.2% 2.2% 2.3% 2.4% 2.6% 200-250 units per year (implies 2-2.5% growth)
Chipotle 9.3% 5.7% 6.0% 6.0% 5.9% 5,000 unit potential
Shake Shack 39.1% 26.9% 23.9% 17.7% 17.4%
Domestic Company 42.6% 30.6% 25.3% 19.7% 17.3% 200+ units by 2020 (implies 27% 2-yr CAGR); 450 unit potential
Licensed 34.6% 21.4% 21.6% 15.3% 17.5% 120+ units by 2020 (implies 19.5% 2-yr CAGR)
JACK target implies meaningful
acceleration from
approx. flat growth over last decade
Consensus expectations for WEN imply notable acceleration from recent
history
Consensus estimates are at high end of
DNKN target, though recent step
down and growth targeted in new markets could be risk
Diversified global growth and expectations for global growth largely in-line with recent
history seems achievable (QSR, YUM, DPZ, SBUX)
104
Source: Credit Suisse estimates
We Prefer Companies with Diversified Growth Strategies – National, International & Formats
National Presence
– Shows brand acceptance across different regions, ability to earn sufficient returns across markets and ability to compete with local and regional brands
International Presence
– Shows ability to adapt menus and cost structures across different regions; increases future growth algorithm; mitigates impact of idiosyncratic challenges in specific markets; often asset-light growth strategy (US companies will often work with well-capitalized partners to grow internationally)
Diversified Real Estate Formats
– Increases unit potential, with ability to earn sufficient returns by adapting formats
– Examples: drive-thru lanes if insufficient room for parking; decrease unit size if lower volume unit
105
Source: Credit Suisse estimates
Exposure to Unit Growth
• Potentially underappreciated unit
growth at QSR from Tim Hortons and Popeyes supported by unique master franchise JV network
• Domestic and international
runway for SHAK
• Potential for accelerating unit
growth for CMG and increased domestic unit potential with new prototypes
• Robust global development at DPZ
with well-capitalized franchisees
• Global unit growth at YUM
supported by development agreements and increased focus on expansion
• Cautious on JACK US unit growth, with low-single-digit target implying acceleration from flat growth over the last decade
• Cautious on DNKN US following a step down from recent history, increased capital requirements for remodels and unit growth targeted in newer markets
• Cautious on WEN international growth as the company has largely failed to execute against unit targets over the last several years and limited international penetration
106
Emerging Themes
107
Source: Nielsen, Credit Suisse estimates
Plant-Based Protein Unlock Incremental Customers and Occasions
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
Feb-1
4
May-
14
Aug-1
4
Nov-
14
Feb-1
5
May-
15
Aug-1
5
Nov-
15
Feb-1
6
May-
16
Aug-1
6
Nov-
16
Feb-1
7
May-
17
Aug-1
7
Nov-
17
Feb-1
8
May-
18
Aug-1
8
Nov-
18
Feb-1
9
May-
19
% o
f M
eat
Alte
rnativ
es
Channel
Plant-based protein is gaining traction with increasing presence in foodservice – opportunity to attract incremental customers & occasions
Emerging companies Beyond Burger and Impossible Foods offer products that mimic meat and largely targeted towards meat eaters
– Within retail channels (Nielsen), “All Other Manufacturers” (majority includes Beyond Burger and Impossible Foods) now represents nearly 20% of the category market share
Burger King is in the process of rolling out the Impossible Whopper nationwide, with early test results suggesting ~20% sales lifts (conservative illustration shows ~4.5% sales lift)
Impossible Whopper – Illustrative Example of Sales Lift All Other Manufacturers as % of Retail Meat Alternative Channel
Beyond Burger & Impossible
Foods make up majority% of “All Other Manufacturers” in Nielsen Meat Alternative Channel
Impossible Whopper Impact Per Store
Burge King US AUV ($000s) $1,400
# Daily Impossible Whoppers Sold 40
Price/Burger $6
Daily Impossible Whopper Sales $240
Annualized Impossible Whopper Sales ($000s) $86.4
% Incremental 75%
Incremental Sales ($000s) $64.8
% Sales Lift 4.6%
Impossible Whopper as % of Sales 4.4%
108
Source: FAA, DOT, WSJ, Uber, Credit Suisse estimates
Drone Delivery Testing Near-Term, But Challenges Exist
Most work on drone delivery is targeted to rural/non-urban areas and in countries outside of the US with less restrictive legal barriers
Significant legal and regulatory challenges to overcome before drone food delivery is possible, including, but not limited to:
– Drone must be in line of sight of the pilot at all times
– Pilot can only operate one drone at a time
– Drone cannot be operated over a non-participating person or moving vehicle
– Drones cannot be operated after dark
– Drones cannot be operated in select airspace
– Complex and potentially contradictory federal, state and local laws
Uber Air – Uber has commented that the company is planning to run limited tests of food delivery by drones, with hope to be commercially operational in multiple markets by 2021
– Plans to deploy autonomous drones in 2019 and begin testing urban drone deliveries for Uber Eats
109
Source: Central Market York, Credit Suisse estimates
Virtual Kitchens
Virtual Kitchens (also known as ghost or dark kitchens) are used to execute orders exclusively for delivery and pickup
Benefits: minimal upfront investment, lower operational costs, faster time to market, benefits from shared services, opportunities to test new markets without significant risk
New concept – restaurants without a physical presence could open a virtual kitchen to test markets or limit risk given much lower initial costs
New markets – existing concepts could use virtual kitchens to test demand in a market before opening a high cost freestanding store
Overflow – restaurants can use virtual kitchens to handle overflow of digital or delivery orders, alleviating challenges from changes in operations and increasing capacity
Third-party delivery companies can use data to determine demand for certain cuisines and in select markets, and partner with existing restaurants or feature pop-up shops without a need to make significant upfront investments
110
Source: Ford, General Motors, WSJ, Activ, Credit Suisse estimates
Autonomous Vehicles Could Be Here Quicker Than We Think
US Auto companies are partnering with third-party delivery partners and select restaurant concepts to test food delivery through autonomous vehicles
– Ford partnering with Postmates, Walmart and Domino’s
Targeted commercial launch in 2021
– General Motors and DoorDash piloting food and grocery delivery
– Toyota and Pizza Hut partnering to test autonomous vehicle concept
Toyota plans to start testing the vehicle as early as 2020
Aptiv and Lyft partnering with recent launch of 30 autonomous vehicles in Las Vegas (Sept 2018)
Waymo (Google) launched a commercial robotaxi service in Phoenix (Dec 2018)
Uber is testing self-driving vehicles
Apple is working on building an autonomous driving system, potentially in partnership with Tesla (recently laid off employees related to its self-driving car program initiative)
111
Recent transactions highlight the changing retail landscape and move to broaden omnichannel capabilities as traditional brick & mortar companies fear the risk from Amazon
– Recent examples include: Kroger/Home Chef, Costco/Blue Apron partnership, Albertsons/Plated, Amazon/Whole Foods, Walmart/Jet
We expect consolidation could continue as traditional brick & mortar grocery companies seek to expand digital reach and improve logistics, while meal kit companies look to reduce customer acquisition costs
But in-store meal kits eliminate the convenience of at-home delivery, could result in significant waste if limited sell-through, could be cannibalistic to the grocery stores and alters the meal kit provider’s previous subscription based revenue stream
Recent Deals Suggest Increased Focus On Alternative Channels, But Should Be Limited Impact
Source: Company data, Credit Suisse estimates
Timeline of Select Meal Kit Deals/Partnerships
May 2018: Kroger announces deal to
acquire Home Chef
September 2017: Albertsons announces
deal to acquire Plated
June 2017: Amazon announces deal to
acquire Whole Foods
August 2016: Walmart announces deal to
acquire Jet.com
April 2018: Blue Apron starts selling
meal kits in select Costco retail stores
112
Company Summaries
113
Source: Company data, Credit Suisse estimates
Chipotle Mexican Grill (CMG) Outperform, $870 TP Executive Summary Key Charts
• Credit Suisse View: CMG has returned to a narrative of
growth rather than recovery, with on-trend initiatives that well position the company to appeal to its target base and outperform peers. Contributions from traffic and average check growth should support mid-single-digit SSS longer-term and generate margin leverage to support an EPS
CAGR of 30%+ through 2022.
• Confidence in Top-Line Performance: CMG’s comprehensive sales plan and omni-channel strategy should generate mid-single-digit SSS. Our confidence in
ongoing momentum includes contributions from: 1) digital & delivery initiatives, with CMG well positioned with a younger consumer base, transportable food, and best-in-class
operations.; 2) new menu innovation; 3) improved social media and marketing strategy; and 4) customer data analytics. Improving new-unit productivity and the potential for alternative formats support mid-single-digit unit growth, with modest step-ups likely.
• Power of the Economic Model: CMG is the only publicly
traded restaurant company in quick serve/fast casual with a 100% company-owned model. A return to $2.4MM AUVs ($2MM currently) should generate restaurant-level margins
of ~24% by 2022 (18.7% in 2018) and new-unit returns of 70-80%.
Units & Unit Growth
Revenue & Revenue Growth
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
500
1,000
1,500
2,000
2,500
3,000
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
YO
Y G
row
th %
Units
Units YOY Growth %
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
$5,500
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
YO
Y G
row
th %
Reve
nue (
$M
M)
Revenue YOY Growth %
Current Price $726.85NTM EV/EBITDA 26.0xNTM P/E 53.0x52-wk Range $385.84-$740.59
Price Date: 6/21/2019
114
Source: Company data, Consensus Metrix, Credit Suisse estimates
Chipotle Mexican Grill (CMG) Outperform, $870 TP Valuation & Risks Valuation History • Our $870 TP is based on:
— EV/EBITDA of 25x our NTM EBITDA in 12 months
— P/E of 46x our NTM EPS in 12 months
• Our EV/EBITDA multiple is largely in-line with CMG’s recent trading multiple
• Key risks: headline risk related to food safety incidents, increased competition, consumer spending deceleration and increased food and supply costs
3-yr Historical EV/EBITDA
3-yr Historical P/E
Credit Suisse Estimates vs Consensus 2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E
SSS 4.0% 9.9% 8.0% 7.5% 6.5% 8.0% 5.5% 5.5%
Consensus 4.0% 9.9% 8.2% 7.1% 5.5% 7.7% 5.3% 4.8%
Units 2,491 2,504 2,527 2,575 2,635 2,635 2,795 2,965
YOY % 3.4% 2.6% 2.4% 4.5% 5.8% 5.8% 6.1% 6.1%
Consensus 2,491 2,504 2,529 2,577 2,634 2,633 2,790 2,958
YOY % 3.4% 2.6% 2.5% 4.6% 5.7% 5.7% 6.0% 6.0%
Revenue ($MM) $4,865 $1,308 $1,400 $1,360 $1,368 $5,435 $6,053 $6,712
YOY % 8.7% 13.9% 10.5% 11.0% 11.7% 11.7% 11.4% 10.9%
Consensus ($MM) $4,865 $1,308 $1,406 $1,357 $1,352 $5,424 $6,038 $6,659
YOY % 8.7% 13.9% 11.0% 10.8% 10.4% 11.5% 11.3% 10.3%
Operating Margin 7.2% 9.0% 10.2% 8.9% 8.6% 9.2% 11.0% 12.4%
Consensus 7.2% 9.0% 10.1% 8.8% 7.6% 8.9% 10.4% 11.3%
EPS $8.88 $3.40 $3.80 $3.26 $3.15 $13.60 $17.89 $22.42
YOY % 34.6% 59.7% 32.2% 50.4% 83.1% 53.1% 31.5% 25.3%
Consensus $8.88 $3.40 $3.76 $3.16 $2.73 $13.05 $16.76 $20.46
YOY % 34.5% 59.6% 31.0% 46.3% 58.7% 47.0% 28.4% 22.1%
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
EV
/EB
ITD
A
NTM EV/EBITDA 3-yr Avg +1 Std Dev -1 Std Dev
10.0x
20.0x
30.0x
40.0x
50.0x
60.0x
70.0x
80.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
P/E
NTM P/E 3-yr Avg +1 Std Dev -1 Std Dev
Current Price $726.85NTM EV/EBITDA 26.0xNTM P/E 53.0x52-wk Range $385.84-$740.59
Price Date: 6/21/2019
115
Source: Company data, Credit Suisse estimates
Dunkin’ Brands Group (DNKN) Underperform, $70 TP Executive Summary Key Charts
• Credit Suisse View: DNKN is trading near peak valuation despite ongoing traffic and SSS challenges and lower
development targets. While we believe DNKN’s 100% franchised business model warrants a premium, DNKN’s multiple has moved in-line with heavily franchised peers despite higher peer multiples driven by business model transformations. We see downside risk to shares against
lower growth prospects and elevated valuation.
• Traffic A Show-Me Story: Traffic has been negative for 12 consecutive quarters (-2.7% in 2018) and a reversal in
trends seems unlikely near-term against competitive headwinds. Mixed brand positioning makes Dunkin’ more susceptible to competition from high- and low-end peers.
While initiatives around espresso, value, operations and digital are positives, we’re cautious on a sustainable
improvement in SSS given recent trends, competitive backdrop and execution concerns.
• Moderating Unit Growth: Following a 4.2% unit CAGR over the last five years, we expect growth of ~2.1% over
the next four, or ~200 units per year (LT guide 200-250 units). Given a primary focus on improving SSS, competitive headwinds, reduced growth in core markets, cost pressures
and increased capital needed for remodels, a more tempered unit growth strategy seems prudent.
Units by Segment
Operating Income by Segment
-
5,000
10,000
15,000
20,000
25,000
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Units
Dunkin' US Dunkin' International
Baskin-Robbins US Baskin-Robbins International
$0
$100
$200
$300
$400
$500
$600
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Opera
ting Inco
me (
$M
M)
Dunkin' US Dunkin' International
Baskin-Robbins US Baskin-Robbins International
Current Price $79.54NTM EV/EBITDA 18.5xNTM P/E 26.4x52-wk Range $61.93-$80.73
Price Date: 6/21/2019
116
Source: Company data, Consensus Metrix, Credit Suisse estimates
Dunkin’ Brands Group (DNKN) Underperform, $70 TP Valuation & Risks Valuation History • Our $70 TP is based on:
— EV/EBITDA of 16x our NTM EBITDA in 12 months
— P/E of ~22x our NTM EPS in 12 months
• Our EV/EBITDA multiple is a ~0.5x turn premium to
DNKN’s 3-yr avg.
• Key risks include M&A, acceleration in traffic, SSS and unit growth, increased competition and debt/interest rates
3-yr Historical EV/EBITDA
3-yr Historical P/E
Credit Suisse Estimates vs Consensus
10.0x
11.0x
12.0x
13.0x
14.0x
15.0x
16.0x
17.0x
18.0x
19.0x
20.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
EV
/EB
ITD
A
NTM EV/EBITDA 3-yr Avg +1 Std Dev -1 Std Dev
16.0x
18.0x
20.0x
22.0x
24.0x
26.0x
28.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
P/E
NTM P/E 3-yr Avg +1 Std Dev -1 Std Dev
2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E
Dunkin' US SSS 0.6% 2.4% 1.0% 1.0% 2.0% 1.6% 1.5% 1.5%
Consensus 0.6% 2.4% 1.3% 1.4% 1.9% 1.7% 1.6% 1.7%
Global Units 20,912 20,920 20,982 21,044 21,176 21,176 21,495 21,814
YOY % 1.9% 1.6% 1.4% 1.3% 1.3% 1.3% 1.5% 1.5%
Consensus 20,912 20,920 20,993 21,067 21,191 21,192 21,516 21,869
YOY % 1.9% 1.6% 1.5% 1.5% 1.3% 1.3% 1.5% 1.6%
System Sales Growth 4.4% 4.1% 2.9% 2.6% 3.7% 3.3% 3.2% 3.2%
Consensus 4.4% 4.1% 2.9% 2.9% 3.6% 3.3% 3.4% 3.7%
Revenue ($MM) $1,322 $319 $363 $361 $337 $1,379 $1,426 $1,472
YOY % 3.6% 5.9% 3.4% 3.0% 5.4% 4.4% 3.3% 3.3%
Consensus ($MM) $1,322 $319 $361 $358 $335 $1,373 $1,418 $1,468
YOY % 3.6% 5.9% 2.8% 2.4% 4.7% 3.9% 3.3% 3.6%
Operating Margin 32.9% 33.3% 34.4% 34.1% 32.2% 33.5% 33.7% 33.9%
Consensus 32.9% 33.3% 34.6% 34.3% 33.1% 33.8% 34.2% 34.4%
EPS $2.90 $0.67 $0.82 $0.81 $0.68 $2.98 $3.16 $3.39
YOY % 40.2% 8.3% 6.4% -2.9% -0.4% 2.7% 6.3% 7.3%
Consensus $2.90 $0.67 $0.82 $0.81 $0.70 $3.00 $3.24 $3.51
YOY % 40.1% 8.1% 6.5% -2.4% 2.9% 3.4% 8.0% 8.3%
Current Price $79.54NTM EV/EBITDA 18.5xNTM P/E 26.4x52-wk Range $61.93-$80.73
Price Date: 6/21/2019
117
Source: Company data, Credit Suisse estimates
Domino’s Pizza (DPZ) Outperform, $320 TP Executive Summary Key Charts
• Credit Suisse View: DPZ is one of the best growth stories
in restaurants, with ~10% revenue growth (~4% SSS, ~7% unit growth), margin expansion and benefits from repurchases driving an EPS CAGR of ~15% over the next four years.
• SSS Outperformance: DPZ should maintain SSS momentum and share gains as one of the few companies with contribution from positive traffic, the only company with a frequency-based loyalty program, consistent value messaging, favorable franchisee relations (avg franchisee
~$975K EBITDA) and an industry-leading digital ecosystem supporting best-in-class execution.
• Third-Party Delivery as NT Pressure, But Not LT Issue: An increasing number of cross-branded campaigns with national QSR chains, competition for delivery drivers and aggressive promos represent incremental competitive pressure NT. LT, pizza’s stable 10-yr ~$10BN delivery market
share should largely hold, with pizza a cuisine that travels well and offers great value. Positioning as a delivery company could be a net positive for DPZ as delivery demand increases, while increased focus on carryout can drive incremental sales and help offset competitive pressures.
Revenue Composition
Unit Composition
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Reve
nue C
om
posi
tion
US Stores International Franchise Supply Chain
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Unit
Com
posi
tion
US Company US Franchise International Franchise
Current Price $280.33NTM EV/EBITDA 21.0xNTM P/E 29.0x52-wk Range $234.35-$300.67
Price Date: 6/21/2019
118
Source: Company data, Consensus Metrix, Credit Suisse estimates
Domino’s Pizza (DPZ) Outperform, $320 TP Valuation & Risks Valuation History • Our $320 TP is based on:
— EV/EBITDA of ~20.5x our NTM EBITDA in 12 months
— P/E of ~28x our NTM EPS in 12 months
• Our EV/EBITDA multiple is in line with DPZ’s current multiple
• Key risks include increased competition, primarily from
third-party delivery, and reduced consumer spending if there is a deterioration in economic conditions
3-yr Historical EV/EBITDA
3-yr Historical P/E
Credit Suisse Estimates vs Consensus
12.0x
14.0x
16.0x
18.0x
20.0x
22.0x
24.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
EV
/EB
ITD
A
NTM EV/EBITDA 3-yr Avg +1 Std Dev -1 Std Dev
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
P/E
NTM P/E 3-yr Avg +1 Std Dev -1 Std Dev
2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E
Domestic SSS 6.6% 3.9% 5.4% 5.8% 6.4% 5.5% 5.0% 4.9%
Consensus 6.6% 3.9% 4.6% 4.9% 5.2% 4.7% 4.2% 4.2%
Global Units 15,914 16,114 16,306 16,568 17,100 17,100 18,328 19,556
YOY % 7.1% 7.7% 7.8% 7.9% 7.5% 7.5% 7.2% 6.7%
Consensus 15,914 16,114 16,305 16,548 17,055 17,061 18,244 19,378
YOY % 7.1% 7.7% 7.8% 7.8% 7.2% 7.2% 6.9% 6.2%
Revenue ($MM) $3,433 $836 $841 $844 $1,165 $3,686 $4,042 $4,386
YOY % 23.1% 6.4% 7.9% 7.3% 7.7% 7.4% 9.7% 8.5%
Consensus ($MM) $3,433 $836 $837 $850 $1,178 $3,701 $4,045 $4,423
YOY % 23.1% 6.4% 7.4% 8.1% 8.8% 7.8% 9.3% 9.3%
Operating Margin 16.7% 17.2% 17.0% 17.1% 17.6% 17.2% 17.8% 17.7%
Consensus 16.7% 17.2% 16.7% 17.1% 17.4% 17.1% 17.5% 17.5%
EPS $8.42 $2.20 $2.08 $2.11 $3.07 $9.44 $11.10 $12.66
YOY % 42.4% 9.7% 12.6% 7.8% 17.2% 12.1% 17.6% 14.1%
Consensus $8.42 $2.20 $2.01 $2.12 $3.10 $9.42 $10.93 $12.45
YOY % 42.5% 10.0% 9.2% 8.7% 18.3% 11.9% 16.0% 13.9%
Current Price $280.33NTM EV/EBITDA 21.0xNTM P/E 29.0x52-wk Range $234.35-$300.67
Price Date: 6/21/2019
119
Source: Company data, Credit Suisse estimates
Jack in the Box (JACK) Underperform, $75 TP Executive Summary Key Charts
• Credit Suisse View: Despite JACK’s enhanced business model (~95% franchised, G&A management, leverage target ~5x), we see risks to LT targets which require acceleration in
top-line trends. With limited visibility into the drivers supporting a sustainable inflection in SSS and unit growth, and fewer levers to unlock value, JACK warrants a valuation discount relative to peers and recent history.
• Top-Line Acceleration Elusive: JACK has demonstrated challenged SSS averaging 0.2% over the last 10 quarters, including traffic of -3.5%, amidst a competitive environment
and company-specific execution. We do not see a clear strategy to reaccelerate traffic trends, with recent value initiatives nothing new and a short-term digital strategy. Unit growth has been flat for nearly a decade, and we are not convinced JACK can meaningfully accelerate given franchisee
tension, investment requirements & margin pressures. We model below-target system sales of ~2%, incl. SSS of 1.5% (3-yr avg 0.6%) & unit growth of 0.7% (3-yr avg -0.2%).
• Cautious on Achievability of Long-Term Targets: We are
cautious on the achievability of FY22 EBITDA (~$300MM) and FCF (~$175MM) targets, which imply SSS and unit growth acceleration to ~3.5-4% from ~1% over the last three years. Visibility into execution against G&A and capex targets is high.
Unit Composition
Revenue by Source
-
500
1,000
1,500
2,000
2,500
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
Units
Company-operated Franchise
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
Reve
nue (
$M
M)
Sales Franchise royalty revenue & fees Franchise rental income
Current Price $85.08NTM EV/EBITDA 12.5xNTM P/E 19.1x52-wk Range $75.18-$92.76
Price Date: 6/21/2019
120
Source: Company data, Consensus Metrix, Credit Suisse estimates
Jack in the Box (JACK) Underperform, $75 TP Valuation & Risks Valuation History • Our $75 TP is based on:
— EV/EBITDA of ~11x our NTM EBITDA in 12 months
— P/E of ~16x our NTM EPS in 12 months
• Our EV/EBITDA multiple reflects a discount to JACK’s 3-yr avg and current multiple of ~12x
• Key risks include: M&A; acceleration in SSS
3-yr Historical EV/EBITDA
3-yr Historical P/E
Credit Suisse Estimates vs Consensus 2018 1Q19 2Q19 3Q19E 4Q19E 2019E 2020E 2021E
SSS 0.1% -0.1% 0.2% 1.5% 1.5% 0.7% 1.5% 1.5%
Consensus 0.1% -0.1% 0.2% 1.8% 1.5% 0.8% 1.7% 1.8%
Global Units 2,237 2,241 2,240 2,245 2,250 2,250 2,266 2,282
YOY % -0.6% -0.4% -0.2% 0.2% 0.6% 0.6% 0.7% 0.7%
Consensus 2,237 2,241 2,240 2,245 2,251 2,251 2,274 2,301
YOY % -0.6% -0.4% -0.2% 0.2% 0.6% 0.6% 1.0% 1.2%
Revenue ($MM) $870 $291 $216 $219 $220 $946 $964 $1,005
YOY % -20.7% -15.3% -12.1% 16.7% 23.2% 8.8% 1.9% 4.3%
Consensus ($MM) $870 $291 $216 $221 $220 $947 $967 $1,002
YOY % -20.7% -1.2% 2.8% 17.4% 23.8% 8.9% 2.1% 3.6%
Operating Margin 28.3% 26.9% 27.2% 26.6% 25.4% 26.5% 26.8% 26.8%
Consensus 30.4% 28.6% 28.4% 28.4% 26.9% 28.1% 28.3% 28.5%
EPS Excl. Gains $3.91 $1.35 $0.99 $0.97 $0.93 $4.26 $4.46 $5.03
YOY % 13.0% 9.9% 27.4% -3.0% 13.1% 9.0% 4.7% 12.8%
Consensus $3.79 $1.35 $0.99 $1.02 $0.91 $4.28 $4.78 $5.49
YOY % #VALUE! -6.2% 6.5% -41.7% 5.8% 12.9% 11.7% 14.9%
8.0x
9.0x
10.0x
11.0x
12.0x
13.0x
14.0x
15.0x
Jun-1
6
Aug-1
6
Oct
-16
Dec-
16
Feb-1
7
Apr-
17
Jun-1
7
Aug-1
7
Oct
-17
Dec-
17
Feb-1
8
Apr-
18
Jun-1
8
Aug-1
8
Oct
-18
Dec-
18
Feb-1
9
Apr-
19
Jun-1
9
EV
/EB
ITD
A
NTM EV/EBITDA 3-yr Avg +1 Std Dev -1 Std Dev
16.0x
17.0x
18.0x
19.0x
20.0x
21.0x
22.0x
23.0x
Jun-1
6
Aug-1
6
Oct
-16
Dec-
16
Feb-1
7
Apr-
17
Jun-1
7
Aug-1
7
Oct
-17
Dec-
17
Feb-1
8
Apr-
18
Jun-1
8
Aug-1
8
Oct
-18
Dec-
18
Feb-1
9
Apr-
19
Jun-1
9
P/E
NTM P/E 3-yr Avg +1 Std Dev -1 Std Dev
Current Price $85.08NTM EV/EBITDA 12.5xNTM P/E 19.1x52-wk Range $75.18-$92.76
Price Date: 6/21/2019
121
Source: Company data, Credit Suisse estimates
McDonald’s (MCD) Outperform, $230 TP Executive Summary Key Charts
• Credit Suisse View: Recent asset and technology investments support a more modernized MCD, and we believe the company is effectively expanding its competitive
moat relative to peers. SSS represent the greatest source of upside to shares, with MCD’s slate of on-trend sales initiatives supporting outperformance. Healthy SSS, defensive characteristics & transition to ~95% franchised support the current premium valuation.
• US Sales Outperformance to Continue: Sales initiatives
are starting to gain traction, and should drive SSS of 4.5%
in 2019 and ~3% LT. We expect momentum to continue with contributions from: 1) delivery (new terms with Uber Eats); 2) digital (recent acq. of Dynamic Yield); 3) Experience of the Future (EOTF) as a net positive; 4) an improved value strategy with a shift to more localized
marketing; and 5) a return to breakfast share gains with local value & service time improvements.
• Digital Supports Future Gains: MCD’s recent tech investments suggest a long-term strategy to develop an
integrated digital infrastructure. With the acquisition of Dynamic Yield, MCD has unlocked access to innovative tech & talent, customer data, & incremental revenue channels over time.
Unit Composition
System Sales by Segment
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Units
US International Lead Markets
High Growth Markets Foundational Markets & Corporate
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Sys
tem
Sale
s ($
MM
)
US International Lead Markets
High Growth Markets Foundational Markets & Corporate
Current Price $204.26NTM EV/EBITDA 17.2xNTM P/E 24.8x52-wk Range $155.41-$205.48
Price Date: 6/21/2019
122
Source: Company data, Consensus Metrix, Credit Suisse estimates
McDonald’s (MCD) Outperform, $230 TP Valuation & Risks Valuation History • Our $230 TP is based on:
— EV/EBITDA of ~18x our NTM EBITDA in 12 months
— Implies a P/E of ~26x our NTM EPS in 12 months
• Our EV/EBITDA multiple is in line with MCD’s current multiple and a premium to its 3-yr avg of ~14.5x
• Key risks include increased competition, changes in consumer spending and FX volatility
3-yr Historical EV/EBITDA
3-yr Historical P/E
Credit Suisse Estimates vs Consensus 2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E
US SSS 2.5% 4.5% 4.5% 4.5% 4.5% 4.5% 3.5% 3.0%
Consensus 2.5% 4.5% 4.0% 4.1% 4.1% 4.2% 3.1% 2.8%
Global Units 37,855 37,971 38,136 38,301 38,576 38,576 39,376 40,296
YOY % 1.6% 1.8% 2.0% 2.0% 1.9% 1.9% 2.1% 2.3%
Consensus 37,855 37,971 38,129 38,300 38,563 38,565 39,368 40,341
YOY % 1.6% 1.8% 1.9% 2.0% 1.9% 1.9% 2.1% 2.5%
Revenue ($MM) $21,025 $4,956 $5,317 $5,458 $5,311 $21,042 $21,614 $22,186
YOY % -7.9% -3.6% -0.7% 1.6% 2.9% 0.1% 2.7% 2.6%
Consensus ($MM) $21,025 $4,956 $5,320 $6,868 $5,292 $21,022 $21,470 $22,095
YOY % -7.9% -3.6% -0.6% 27.9% 2.5% 0.0% 2.1% 2.9%
Operating Margin 43.3% 42.3% 44.2% 45.7% 43.2% 43.9% 45.1% 46.1%
Consensus 43.1% 42.3% 44.1% 45.7% 43.1% 43.9% 45.3% 46.4%
EPS $7.90 $1.72 $2.06 $2.22 $2.03 $8.03 $8.74 $9.45
YOY % 18.9% -3.7% 3.5% 2.7% 3.3% 1.6% 8.8% 8.1%
Consensus $7.90 $1.72 $2.05 $2.21 $2.02 $7.99 $8.67 $9.37
YOY % 19.2% -3.9% 3.0% 2.3% 2.5% 1.1% 8.5% 8.1%
10.0x
11.0x
12.0x
13.0x
14.0x
15.0x
16.0x
17.0x
18.0x
19.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
EV
/EB
ITD
A
NTM EV/EBITDA 3-yr Avg +1 Std Dev -1 Std Dev
16.0x
18.0x
20.0x
22.0x
24.0x
26.0x
28.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
P/E
NTM P/E 3-yr Avg +1 Std Dev -1 Std Dev
Current Price $204.26NTM EV/EBITDA 17.2xNTM P/E 24.8x52-wk Range $155.41-$205.48
Price Date: 6/21/2019
123
Source: Company data, Credit Suisse estimates
Papa John’s International (PZZA) Neutral, $45 TP Executive Summary Key Charts
• Credit Suisse View: PZZA is trading at a ~16x EV/EBITDA multiple without signs of a sustainable inflection in trends and high execution risk. PZZA recently announced intentions to invest $80MM through 2020 in the form of marketing and
franchisee royalty relief, suggesting the company is still facing consumer sentiment challenges and franchisee pressure is building. While we see risk to numbers and the multiple, short interest of ~30% of float (8 days to cover), activist involvement and takeout potential keep us Neutral.
• Catalysts Supporting Potential Upside: Starboard’s
investment, board changes, cultural initiatives, a new CMO
and the partnership with Shaquille O’Neal could gain traction faster than expected. Initiatives around marketing and value could be meaningful, with both lacking even prior to brand challenges. PZZA has also been cited as a potential acquisition target.
• Cautious on Execution: Consumer sentiment challenges
continue to weigh on sales trends and franchisee profitability. PZZA is investing $80MM to provide financial assistance to franchisees and increase marketing support through 2020.
We anticipate PZZA will use debt to fund the investment, further pressuring earnings. We’re cautious on the outlook given heightened competition, lack of effective value messaging and a challenging cost environment exacerbated by declining sales, with risk of elevated franchisee closures.
Unit Composition
System Sales
-
1,000
2,000
3,000
4,000
5,000
6,000
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Units
Company North America Franchise International Franchise
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Sys
tem
Sale
s ($
MM
)
Domestic International
Current Price $44.37NTM EV/EBITDA 16.4xNTM P/E 36.8x52-wk Range $38.51-$59.04
Price Date: 6/21/2019
124
Source: Company data, Consensus Metrix, Credit Suisse estimates
Papa John’s International (PZZA) Neutral, $45 TP Valuation & Risks Valuation History • Our $45 TP is based on:
— EV/EBITDA of ~13.2x our NTM EBITDA in 12 months
— Implies a P/E of ~33x our NTM EPS in 12 months
• Our EV/EBITDA multiple is a discount to PZZA’s 5-yr avg and current multiple given ongoing uncertainty regarding the
long-term outlook
• Key risks include: M&A, short squeeze, increased
competition, consumer sentiment challenges
5-yr Historical EV/EBITDA
5-yr Historical P/E
Credit Suisse Estimates vs Consensus 2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E
North America SSS -7.3% -6.9% -5.6% -1.5% -0.5% -3.6% 1.4% 2.0%
Consensus -7.3% -6.9% -5.8% -1.6% 0.9% -3.3% 2.2% 2.2%
Global Units 5,303 5,336 5,352 5,388 5,434 5,434 5,606 5,790
YOY % 2.0% 2.4% 2.0% 2.7% 2.5% 2.5% 3.2% 3.3%
Consensus 5,303 5,336 5,355 5,381 5,445 5,445 5,628 5,762
YOY % 2.0% 2.4% 2.1% 2.6% 2.7% 2.7% 3.4% 2.4%
Revenue ($MM) $1,611 $403 $392 $386 $401 $1,582 $1,609 $1,652
YOY % -9.6% -10.4% -4.0% 3.2% 5.6% -1.8% 1.7% 2.7%
Consensus ($MM) $1,573 $398 $392 $380 $398 $1,569 $1,621 $1,656
YOY % -11.8% -6.8% -3.9% 4.5% 6.4% -0.3% 3.3% 2.2%
Operating Margin 5.1% 5.3% 5.3% 3.7% 4.8% 4.8% 5.2% 5.7%
Consensus 5.2% 5.4% 5.1% 4.1% 5.1% 4.9% 5.8% 4.4%
EPS $1.38 $0.31 $0.32 $0.16 $0.29 $1.08 $1.31 $1.55
YOY % -48.5% -41.9% -34.7% -17.5% 96.2% -21.7% 21.5% 18.1%
Consensus $1.34 $0.31 $0.29 $0.20 $0.36 $1.16 $1.69
YOY % -49.8% -38.0% -40.8% 0.0% 140.0% -13.4% 45.7% -100.0%
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
EV
/EB
ITD
A
NTM EV/EBITDA 5-yr Avg +1 Std Dev -1 Std Dev
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
45.0x
Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
P/E
NTM P/E 5-yr Avg +1 Std Dev -1 Std Dev
Current Price $44.37NTM EV/EBITDA 16.4xNTM P/E 36.8x52-wk Range $38.51-$59.04
Price Date: 6/21/2019
125
Source: Company data, Credit Suisse estimates
Restaurant Brands International (QSR) Outperform, $78 TP Executive Summary Key Charts
• Credit Suisse View: RBI is well positioned to generate
global market share gains across its portfolio with contribution from SSS and unit growth. Increased confidence in accelerating SSS and sustainable global unit growth across the portfolio should support multiple expansion. We model EPS growth in the high-single-digits, with SSS
outperformance, TH unit growth acceleration & TH margin expansion as opportunities for upside.
• RBI Well Positioned In Home Markets: BK has plans to roll out the Impossible Whopper nationwide by the end of
2019, which could contribute at least ~460bps to US SSS (assumes 40 units sold per day per store). Digital enhancements and menu innovation support confidence in
momentum at Tim Hortons Canada (~50% customers on loyalty and Beyond sausage expected to rollout system-wide).
• Global Unit Growth Story Intact: We expect RBI to generate global unit growth of ~5.5% over the next four
years, an acceleration from ~5.2% over the past four years. International master franchise joint venture (MFJV) agreements offer confidence in the achievability of targets, largely driven by global strength at BK and whitespace potential for Popeyes in a growing chicken category. Better-
than-expected growth at TH could represent upside.
Units by Segment
EBITDA by Segment
4.4K 4.6K 4.7K 4.8K
15.0K 15.7K 16.8K 17.8K
2.9K3.1K
19.4K20.4K
24.4K25.7K
0.0K
5.0K
10.0K
15.0K
20.0K
25.0K
30.0K
2015 2016 2017 2018
Glo
bal U
nit
Count
Tim Hortons Burger King Popeyes
$906 $1,072 $1,136 $1,128
$760
$816 $903 $930
$107 $155
$0
$500
$1,000
$1,500
$2,000
$2,500
2015 2016 2017 2018
EB
ITD
A (
$M
M)
Tim Hortons Burger King Popeyes
Current Price $69.99NTM EV/EBITDA 17.6xNTM P/E 25.5x52-wk Range $50.61-$69.99
Price Date: 6/21/2019
126
Source: Company data, Consensus Metrix, Credit Suisse estimates
Restaurant Brands International (QSR) Outperform, $78 TP Valuation & Risks Valuation History • Our $78 TP is based on:
— EV/EBITDA of ~19x our NTM EBITDA in 12 months
— P/E of ~25.5x our NTM EPS in 12 months
• Our EV/EBITDA multiple reflects multiple expansion, with expectations for a return to a valuation premium relative to
heavily franchised peers
• Key risks: include increased competition, changes in
consumer spending and FX volatility
3-yr Historical EV/EBITDA
3-yr Historical P/E
Credit Suisse Estimates vs Consensus
12.0x
13.0x
14.0x
15.0x
16.0x
17.0x
18.0x
19.0x
20.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
EV
/EB
ITD
A
NTM EV/EBITDA 3-yr Avg +1 Std Dev -1 Std Dev
15.0x
17.0x
19.0x
21.0x
23.0x
25.0x
27.0x
29.0x
31.0x
33.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
P/E
NTM P/E 3-yr Avg +1 Std Dev -1 Std Dev
2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E
BK Global SSS 2.0% 2.2% 2.5% 3.0% 3.0% 2.7% 2.5% 2.5% Consensus 2.0% 2.2% 2.3% 2.6% 2.4% 2.3% 2.2% 2.2%TH Global SSS 0.6% -0.6% 1.1% 1.6% 1.2% 0.9% 1.6% 1.8% Consensus 0.6% -0.6% 1.2% 1.4% 1.0% 0.8% 1.5% 1.7%PLK Global SSS 1.6% 0.6% 0.8% 1.8% 2.2% 1.4% 1.7% 1.8% Consensus 1.6% 0.6% 0.8% 1.7% 1.9% 1.3% 1.7% 1.9%
Global Units 25,744 25,809 26,079 26,419 27,094 27,094 28,614 30,194 YOY % 5.5% 5.1% 5.2% 5.4% 5.2% 5.2% 5.6% 5.5% Consensus 25,744 25,809 26,080 26,404 27,063 27,063 28,597 30,136 YOY % 5.5% 5.1% 5.2% 5.3% 5.1% 5.1% 5.7% 5.4%
Revenue ($MM) $5,358 $1,266 $1,390 $1,456 $1,467 $5,579 $5,882 $6,196 YOY % 17.1% 1.0% 3.4% 5.9% 5.9% 4.1% 5.4% 5.3% Consensus ($MM) $5,357 $1,266 $1,392 $1,451 $1,467 $5,578 $5,869 $6,149 YOY % 17.1% 1.0% 3.6% 5.5% 5.9% 4.1% 5.2% 4.8%
Operating Margin 37.5% 34.4% 37.7% 37.7% 37.7% 37.0% 38.0% 38.5% Consensus 37.5% 34.4% 37.7% 38.0% 38.6% 37.3% 38.3% 38.9%
EPS $2.63 $0.55 $0.68 $0.72 $0.75 $2.70 $2.99 $3.29 YOY % 25.2% -17.4% 3.3% 15.4% 9.9% 2.6% 11.0% 9.9% Consensus $2.63 $0.55 $0.67 $0.71 $0.74 $2.68 $2.97 $3.24 YOY % 25.2% -16.7% 1.5% 12.7% 8.8% 1.9% 10.8% 9.1%
Current Price $69.99NTM EV/EBITDA 17.6xNTM P/E 25.5x52-wk Range $50.61-$69.99
Price Date: 6/21/2019
127
Source: Company data, Credit Suisse estimates
Shake Shack (SHAK) Outperform, $77 TP Executive Summary Key Charts
• Credit Suisse View: Brand affinity and on-trend initiatives
support demand, while strong unit economics (returns ~50%) and demonstrated success across markets offer confidence in the whitespace potential. Sustained new unit productivity, timing of opens, SSS and unit growth represent upside potential. Growth in penetrated markets should help the
company leverage costs and increase efficiency over time.
• Growing Pains: Traffic and SSS likely remain volatile NT, but should stabilize as the growth rate decelerates, the comp base comprises a greater percentage of the system and
impact of indirect cannibalization (reduced exclusivity) dissipates. While SSS have limited impact on the model (1% SSS = $4.5MM revs), a return to more normalized SSS
should improve sentiment given limited visibility into the underlying portfolio with a range of volumes across markets, sophomore class unit declines (5% on average) and units entering the comp base in year 3.
• Margin Outlook Difficult, But Opportunities Exist: We expect restaurant margins to contract another 130-230bps in 2019, following 350bps of decline since 2015. While we model ~10-20bps of ongoing margin contraction from lower unit AUVs long term, we see opportunities for some margin
recovery through revised delivery terms, SSS leverage, higher price, favorable new unit mix and contribution from digital.
Unit Composition
System Sales Composition
-
50
100
150
200
250
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Units
Domestic Company-Operated Domestic Licensed International Licensed
$0
$100
$200
$300
$400
$500
$600
$700
$800
2014 2015 2016 2017 2018
Sys
tem
Sale
s ($
MM
)
Domestic Company Domestic & International License
Current Price $66.75NTM EV/EBITDA 28.8xNTM P/E 113.8x52-wk Range $41.01-$68.61
As of Price Date: 6/21/2019
128
Source: Company data, Consensus Metrix, Credit Suisse estimates
Shake Shack (SHAK) Outperform, $77 TP Valuation & Risks Valuation History • Our $77 TP is based on:
— EV/EBITDA of ~26x our NTM EBITDA in 12 months
— Implies a P/E of ~82x our NTM EPS in 12 months
• Our EV/EBITDA multiple is in-line with SHAK’s valuation multiple over the last few months, and a discount to
SHAK’s current multiple of ~28x
• Key risks include: changes in consumer spending, inflation;
new unit productivity
3-yr Historical EV/EBITDA
3-yr Historical P/E
Credit Suisse Estimates vs Consensus 2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E
SSS 1.0% 3.6% 3.0% 3.5% 0.5% 2.6% 1.9% 2.0%
Consensus 1.0% 3.6% 1.5% 2.4% 0.8% 2.1% 1.4% 1.6%
Global Units 208 218 229 242 266 266 332 396
YOY % 30.8% 29.8% 27.9% 28.7% 27.9% 27.9% 24.8% 19.3%
Consensus 208 218 230 243 264 264 327 385
YOY % 30.8% 29.8% 28.5% 29.3% 26.9% 26.9% 23.9% 17.7%
Revenue ($MM) $459 $133 $150 $154 $154 $591 $756 $899
YOY % 28.0% 33.8% 29.0% 28.5% 24.2% 28.6% 27.9% 18.9%
Consensus ($MM) $459 $133 $147 $152 $153 $585 $728 $865
YOY % 28.0% 33.8% 26.8% 27.0% 23.3% 27.4% 24.3% 18.8%
Operating Margin 7.7% 4.3% 8.7% 7.2% 1.7% 5.5% 6.2% 6.4%
Consensus 7.7% 4.3% 7.4% 6.5% 0.9% 4.8% 4.9% 5.0%
EPS $0.71 $0.13 $0.26 $0.22 $0.05 $0.66 $0.90 $1.08
YOY % 25.8% -13.3% -11.3% 4.7% -15.2% -7.6% 36.2% 20.9%
Consensus $0.71 $0.13 $0.21 $0.19 $0.03 $0.57 $0.71 $0.87
YOY % 24.6% -18.8% -27.6% -9.5% -50.0% -19.7% 24.6% 22.5%
8.0x
13.0x
18.0x
23.0x
28.0x
33.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
EV
/EB
ITD
A
NTM EV/EBITDA 3-yr Avg +1 Std Dev -1 Std Dev
40.0x
50.0x
60.0x
70.0x
80.0x
90.0x
100.0x
110.0x
120.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
P/E
NTM P/E 3-yr Avg +1 Std Dev -1 Std Dev
Current Price $66.75NTM EV/EBITDA 28.8xNTM P/E 113.8x52-wk Range $41.01-$68.61
As of Price Date: 6/21/2019
129
Source: Company data, Credit Suisse estimates
Starbucks (SBUX) Outperform, $92 TP Executive Summary Key Charts
• Credit Suisse View: SBUX is one of the highest quality growth companies in restaurants, with ~8% rev growth
(guide: 7-9%), modest margin expansion and repurchases supporting our ~14.5% EPS growth 4-yr CAGR (guide: 10%+). Consistent 3-4% Americas SSS should support current valuation, with Americas sales leverage, improved performance in China, global margin expansion and strategic
optionality as drivers of upside.
• Americas SSS As Primary Focus: An evolving digital ecosystem, beverage innovation, improved food platform,
enhanced operations and pricing power support our 3-4% SSS estimate long term. SBUX’s loyalty program drives nearly all of its comp growth, and conversion of its non-rewards customers could be a powerful SSS unlock.
• EPS Growth Story Intact: Guidance for long-term growth of
10%+ appears achievable, with opportunity for a return to beat and raises with a lower bar and margins at multi-year lows (guide 17-18%; 5-yr avg. 19%). Greater sales leverage
in Americas (~65% operating profit), better-than-expected traction in China from recent initiatives (CAP ~20% operating profit) and strategic optionality represent the greatest sources of upside. SBUX’s 3-yr $25BN capital return (FY18-FY20), leverage and G&A savings targets improve EPS visibility with
more controllable factors.
Revenue by Segment
Units by Segment
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Reve
nue (
$M
M)
Americas EMEA CAP Channel Development Corporate & Other
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Units
Americas EMEA CAP Corporate & Other
Current Price $83.82NTM EV/EBITDA 18.0xNTM P/E 29.0x52-wk Range $48.54-$84.69
Price Date: 6/21/2019
130
Source: Company data, Consensus Metrix, Credit Suisse estimates
Starbucks (SBUX) Outperform, $92 TP Valuation & Risks Valuation History • Our $92 TP is based on:
— P/E of ~27x our NTM EPS in 12 months
— Implies an EV/EBITDA of ~18x our NTM EBITDA in 12 months
• Our P/E multiple is in-line with SBUX’s current trading
multiple, reflecting a premium to its 5-yr avg
• Key risks include: increased competition, changes in
consumer spending and inflation
5-yr Historical EV/EBITDA
5-yr Historical P/E
Credit Suisse Estimates vs Consensus
10.0x
11.0x
12.0x
13.0x
14.0x
15.0x
16.0x
17.0x
18.0x
19.0x
Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
EV
/EB
ITD
A
NTM EV/EBITDA 5-yr Avg +1 Std Dev -1 Std Dev
16.0x
18.0x
20.0x
22.0x
24.0x
26.0x
28.0x
30.0x
32.0x
34.0x
36.0x
Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
P/E
NTM P/E 5-yr Avg +1 Std Dev -1 Std Dev
2018 1Q19 2Q19 3Q19E 4Q19E 2019E 2020E 2021E
Americas SSS 2.0% 4.0% 4.0% 4.0% 3.0% 3.7% 3.7% 3.5%
Consensus 2.0% 4.0% 4.0% 4.3% 2.8% 3.8% 3.0% 3.0%
Global Units 29,324 29,865 30,184 30,721 31,364 31,364 33,536 35,746
YOY % 7.3% 6.5% 7.0% 7.0% 7.0% 7.0% 6.9% 6.6%
Consensus 29,324 29,865 30,184 30,749 31,395 31,398 33,562 35,784
YOY % 7.3% 0 0 7.1% 7.1% 7.1% 6.9% 6.6%
Revenue ($MM) $24,719 $6,633 $6,306 $6,653 $6,691 $26,282 $28,496 $31,296
YOY % 10.4% 9.2% 4.5% 5.4% 6.1% 6.3% 8.4% 9.8%
Consensus ($MM) $24,719 $6,633 $6,306 $6,671 $6,636 $26,246 $28,233 $30,372
YOY % 10.4% 9.2% 4.5% 5.7% 5.3% 6.2% 7.6% 7.6%
Operating Margin 18.0% 17.4% 15.8% 18.1% 17.6% 17.3% 17.7% 18.2%
Consensus 18.0% 17.4% 15.8% 18.0% 17.4% 17.2% 17.6% 18.0%
EPS $2.42 $0.75 $0.60 $0.73 $0.71 $2.79 $3.15 $3.70
YOY % 17.5% 14.7% 13.0% 17.8% 14.4% 15.0% 13.1% 17.3%
Consensus $2.42 $0.75 $0.60 $0.72 $0.71 $2.78 $3.09 $3.50
YOY % 17.5% 15.4% 13.2% 16.1% 14.5% 14.9% 11.2% 13.3%
Current Price $83.82NTM EV/EBITDA 18.0xNTM P/E 29.0x52-wk Range $48.54-$84.69
Price Date: 6/21/2019
131
Source: Company data, Credit Suisse estimates
The Wendy’s Company (WEN) Neutral, $20 TP Executive Summary Key Charts
• Credit Suisse View: Following WEN’s transformation over the last several years, its business model reflects an improved and more consistent FCF profile. But the story shifts to execution, and we are cautious on a meaningful acceleration in SSS and unit growth from recent levels. With shares
trading near peak and limited visibility into a meaningful inflection in top-line trends, we rate shares Neutral.
• Solid Outlook, but Heavy Competition: WEN’s historical focus on traffic-driving initiatives and prudent approach to
pricing has supported positive and consistent SSS growth
averaging ~2% over the last five years. A balanced high-low menu approach, digital, delivery and remodels should
contribute to SSS of ~1.8% over the next few years, but heightened competition will likely pressure more meaningful share gains. Unit growth acceleration remains a show-me story, particularly in international markets. We model unit growth of 1.5% over the next four years.
• FCF Expectations at Low End of Guide: Execution against
sales initiatives and unit growth will be the primary drivers of normalized 4-5% FCF growth post 2020. Operating margins are now at peak levels, and it is difficult to identify
opportunities to drive that much higher following recent optimization efforts.
Revenue Composition
Unit Composition
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2013 2014 2015 2016 2017 2018
Reve
nue (
$M
M)
Sales Franchise Royalty Revenue & FeesFranchise Rental Income Advertising Funds Revenue
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Units
Company North America Franchise International Franchise
Current Price $19.37NTM EV/EBITDA 15.1xNTM P/E 30.3x52-wk Range $15.00-$19.88
Price Date: 6/21/2019
132
Source: Company data, Consensus Metrix, Credit Suisse estimates
The Wendy’s Company (WEN) Neutral, $20 TP Valuation & Risks Valuation History • Our $20 TP is based on:
— EV/EBITDA of ~14x our NTM EBITDA in 12 months
• Our EV/EBITDA multiple is in-line with WEN’s 3-year
average
• Key risks include: increased competition, inflation and
interest rates
3-yr Historical EV/EBITDA
3-yr Historical P/E
Credit Suisse Estimates vs Consensus 2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E
North America SSS 0.9% 1.3% 1.1% 2.4% 2.1% 1.7% 1.7% 1.8%
Consensus 0.9% 1.3% 1.3% 2.3% 2.1% 1.7% 1.8% 1.8%
Global Units 6,711 6,710 6,721 6,742 6,788 6,788 6,892 7,006
YOY % 1.2% 1.2% 1.0% 1.1% 1.1% 1.1% 1.5% 1.7%
Consensus 6,711 6,710 6,738 6,764 6,813 6,812 6,943 7,106
YOY % 1.2% 1.2% 1.2% 1.4% 1.5% 1.5% 1.9% 2.3%
Revenue ($MM) $1,590 $409 $438 $430 $419 $1,696 $1,772 $1,800
YOY % 3.8% 7.4% 6.6% 7.4% 5.2% 6.6% 4.5% 1.6%
Consensus ($MM) $1,590 $409 $440 $430 $424 $1,702 $1,780 $1,824
YOY % 3.8% 7.4% 7.0% 7.4% 6.5% 7.1% 4.6% 2.5%
Operating Margin 18.0% 16.8% 18.4% 17.5% 17.2% 17.5% 18.4% 18.6%
Consensus 18.0% 16.8% 18.3% 18.0% 17.7% 17.7% 18.9% 19.1%
EPS $0.59 $0.14 $0.18 $0.16 $0.15 $0.63 $0.76 $0.81
YOY % 49.6% 27.4% 27.1% -7.4% -7.5% 7.5% 20.2% 6.5%
Consensus $0.59 $0.14 $0.17 $0.16 $0.16 $0.63 $0.77 $0.85
YOY % 51.3% 27.3% 21.4% -5.9% 0.0% 6.8% 22.2% 10.4%
10.0x
11.0x
12.0x
13.0x
14.0x
15.0x
16.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
EV
/EB
ITD
A
NTM EV/EBITDA 3-yr Avg +1 Std Dev -1 Std Dev
17.0x
19.0x
21.0x
23.0x
25.0x
27.0x
29.0x
31.0x
33.0x
35.0x
Jun-1
6
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-1
9
P/E
NTM P/E 3-yr Avg +1 Std Dev -1 Std Dev
Current Price $19.37NTM EV/EBITDA 15.1xNTM P/E 30.3x52-wk Range $15.00-$19.88
Price Date: 6/21/2019
133
Source: Company data, Credit Suisse estimates
Yum! Brands (YUM) Neutral, $106 TP Executive Summary Key Charts
• Credit Suisse View: YUM’s ~98% franchise business model, diversified global portfolio and low operating leverage support high visibility into ongoing low-teens earnings growth
(we model ~14% long term). YUM’s proven ability to execute against long-term targets and a more controllable earnings algorithm support a premium valuation. But at current valuation, YUM is trading above its historical avg and relative to heavily franchised peers; we see limited upside to shares.
• Unit growth to represent majority of top line: We expect YUM to generate system sales growth of ~6% over the next
few years, including ~4% unit growth and ~2.5% SSS. Development agreements tied to refranchising deals, accelerating growth in China, Taco Bell (TB) US franchisee appetite for growth and management development expertise support our expectations for achievability of targets.
• Contribution from delivery elusive: YUM’s partnership
with Grubhub (GRUB) unlocks an asset-light delivery network, favorable terms and access to data, but we do not view single platform presence alone as sustainable. We are
skeptical delivery will be meaningful for TB with a low average ticket and food might not hold. KFC could realize the most benefits (legacy real estate; conducive to travel); we have a mixed view on the opportunity for PH.
Unit Growth
System Sales Growth
3.6%
3.0%2.8%
3.2%
3.9%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2014 2015 2016 2017 2018
Glo
bal N
et
Unit
Gro
wth
KFC Pizza Hut Taco Bell
2.7%
3.9%
5.4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2016 2017 2018
Sys
tem
Sale
s G
row
th
KFC Pizza Hut Taco Bell
Current Price $110.27NTM EV/EBITDA 20.9xNTM P/E 28.3x52-wk Range $77.74-$110.62
Price Date: 6/21/2019
134
Source: Company data, Consensus Metrix, Credit Suisse estimates
Yum! Brands (YUM) Neutral, $106 TP Valuation & Risks Valuation History • Our $106 TP is based on:
— EV/EBITDA of ~19x our NTM EBITDA in 12 months
— P/E of ~25x our NTM EPS in 12 months
• Our EV/EBITDA multiple reflects a premium to YUM’s 3-yr average, and a discount to its current multiple of ~20x
• Key risks include: increased competition, changes in macro environment and FX volatility
Post China Spin EV/EBITDA
Post China Spin P/E
Credit Suisse Estimates vs Consensus 2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E
KFC SSS 2.0% 5.0% 4.0% 2.5% 2.5% 3.4% 2.5% 2.5% Consensus 2.0% 5.0% 3.9% 2.6% 2.6% 3.5% 2.5% 2.5%Pizza Hut SSS 0.0% 0.0% 1.0% 0.5% 0.5% 0.5% 0.5% 1.0% Consensus 0.0% 0.0% 1.1% 1.1% 0.8% 0.8% 1.0% 1.3%Taco Bell SSS 4.0% 4.0% 4.0% 2.0% 1.5% 2.7% 2.8% 3.0% Consensus 4.0% 4.0% 3.7% 2.2% 2.2% 3.0% 2.7% 2.7%
Global Units 48,124 48,457 48,749 49,161 50,063 50,063 52,011 54,019 YOY % 6.7% 6.9% 7.0% 6.9% 4.0% 4.0% 3.9% 3.9% Consensus 48,124 48,457 48,764 49,198 50,100 50,099 52,148 54,253 YOY % 6.7% 6.9% 7.0% 7.0% 4.1% 4.1% 4.1% 4.0%
Revenue ($MM) $5,688 $1,254 $1,284 $1,334 $1,636 $5,508 $5,717 $6,034 YOY % -3.2% -8.5% -6.1% -4.1% 5.0% -3.2% 3.8% 5.5% Consensus ($MM) $5,688 $1,254 $1,279 $1,338 $1,639 $5,510 $5,761 $6,122 YOY % -3.2% -8.5% -6.5% -3.8% 5.2% -3.1% 4.6% 6.3%
Operating Margin 31.0% 34.2% 35.9% 36.9% 34.4% 35.3% 35.9% 36.3% Consensus 31.1% 34.2% 35.8% 36.9% 34.9% 35.4% 36.1% 36.3%
EPS $3.17 $0.82 $0.88 $0.96 $1.16 $3.82 $4.13 $4.63 YOY % 7.0% -8.0% 7.7% -7.6% 188.0% 20.5% 8.1% 12.1% Consensus $3.17 $0.82 $0.87 $0.96 $1.17 $3.81 $4.22 $4.74 YOY % 7.1% -8.9% 6.1% -7.7% 192.5% 20.2% 10.8% 12.3%
13.0x
14.0x
15.0x
16.0x
17.0x
18.0x
19.0x
20.0x
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
EV
/EB
ITD
A
NTM EV/EBITDA Avg Post China Spin
+1 Std Dev -1 Std Dev
20.0x
21.0x
22.0x
23.0x
24.0x
25.0x
26.0x
27.0x
Dec-
16
Feb-
17
Apr-
17
Jun-1
7
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-1
8
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
P/E
NTM P/E Avg Post China Spin
+1 Std Dev -1 Std Dev
Current Price $110.27NTM EV/EBITDA 20.9xNTM P/E 28.3x52-wk Range $77.74-$110.62
135
Credit Suisse HOLT® Analysis
Market implied growth vs. historical CAGR (sorted by difference between market implied and history)
Source: HOLT. Research forecasts.
136
40%
14% 11% 9% 9%
4% 6%
(1%)
(11%) (9%) (9%)
10% 7% 6% 4% 5% 4% 6% 5%
2% 4% 6%
(30%)
(6%) (5%) (5%) (3%)
0% 0%
6%
13% 13% 15%
SHAK CMG SBUX DPZ QSR PZZA DNKN MCD JACK WEN YUM
Last 10 year CAGR Market implied Market implied vs. historical CAGR
OP OP OP OP OP N UP N N OP UP
This analysis is based on the HOLT DCF framework and uses our Research forecasts as a starting point, keeping margins constant through 2030 and solving for the long term sales CAGR required to justify current valuations
After the explicit forecast (2030 for all companies and 2035 for SHAK and CMG), HOLT calculates the terminal value by fading returns on capital and growth towards cost of capital and GDP growth respectively. HOLT standard fade rate is 10%; for this analysis, we have adjusted the fade rate to 5% across our coverage, to account for the sector’s longer sustainability
HOLT’s discount rate is based on a market derived discount rate and specific company adjustments for size and leverage. For this analysis, we are using the US Country discount rate of 3.8% (inflation adjusted) across our coverage
Methodology
HOLT market implied expectations analysis: Long-term sales growth implied by current valuations
137
Restaurants’ returns on capital have been on a steady upward trend over the past few years and recently reached historical highs, consensus is forecasting further upside from here
Return on capital – CFROI® (%)
Restaurants coverage aggregate – historical performance
Source: HOLT.
Weighted average performance of our coverage: QSR, DPZ, CMG, MCD, SHAK, SBUX, WEN, PZZA, DNKN, JACK, YUM.
Margins (%)
Turns (Sales / Invested capital, x)
Drivers of returns on capital
Returns on capital and growth drive valuation multiples across our coverage, SHAK stands out because of its high growth, while DPZ stands out for its best in class returns on capital and above median growth
138
Source: HOLT, IBES estimates.
(1) FY1- FY3 sales CAGR based on consensus estimates.
Forecast returns on capital: 2020E CFROI(2)
Fore
cast F
Y1
-FY
3 s
ale
s C
AG
R
Bubble size and label represent 2020E EV/EBITDA
Ab
ove
me
dia
n g
row
th
Be
low
me
dia
n g
row
th
Above median profitability Below median profitability
GR
OW
TH
PROFITABILITY
median FY2 CFROI: 13.6%
(2) 2020E CFROI based on consensus EPS estimates and HOLT.
YUM: 19.7x
PZZA: 18.3x
DNKN: 18.1x
WEN: 14.4x
JACK: 12.1x
QSR: 17.1x
SBUX: 16.2x
MCD: 16.4x
DPZ: 19.7x
SHAK: 26.3x
CMG: 23.5x
0%
5%
10%
15%
20%
25%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Neutral Outperform Underperform
Quadrant median
FY2 EV/EBITDA :
18.2x
Quadrant median
FY2 EV/EBITDA :
14.5x
median sales growth: 4.8%
Most restaurants have increased returns on capital significantly over the past 10 years, driven by margin improvement, that has offset declining asset efficiency
139 Source: HOLT. Research forecasts. SHAK’s data starts from the year 2012 while DNKN’s data starts from 2009.
10 year change in returns on capital (CFROI)
10 year change in EBITDAR margins
10 year change in asset efficiency
13%
23%
8% 11% 7% 8% 7%
11%
29%
8% 13%
30% 38%
7% 13%
4%
16% 8% 6%
30%
9%
31%
16% 15%
(1%)
1%
(3%)
8% 1%
(5%)
0% 1%
17%
QSR DPZ CMG MCD SHAK SBUX WEN PZZA DNKN JACK YUM
2008
2018
2018 vs.2008 change
26%
17% 21%
38%
20% 19% 14% 12%
58%
20% 23%
46%
22%
18%
54%
21%
27% 31%
9%
61% 51% 47%
20%
5%
(3%)
16%
1% 8%
17%
(3%)
3%
30% 24%
QSR DPZ CMG MCD SHAK SBUX WEN PZZA DNKN JACK YUM
2008
2018
2018 vs. 2008
0.8x
1.6x
0.7x 0.4x 0.6x
0.8x 0.7x
1.6x
0.6x 0.6x 0.8x 0.7x
2.0x
0.8x 0.3x
0.5x 0.8x 0.3x
1.2x 0.6x
0.2x 0.7x
(0.1x)
0.4x 0.1x
(0.1x) (0.1x) (0.1x) (0.4x) (0.4x)
(0.0x)
(0.4x)
(0.0x)
QSR DPZ CMG MCD SHAK SBUX WEN PZZA DNKN JACK YUM
2008
2018
2018 vs. 2008
Returns on capital and growth vs. valuation multiples
Our Restaurant coverage’s combination of returns on capital and growth are above the median of all US sectors, sharing the top right quadrant only with Tech
140
Source: HOLT, IBES estimates. Note- IBES EV for PZZA was not available, hence EV / FY1 EBITDA from HOLT is considered.
(1) FY1- FY2 sales growth based on consensus estimates.
Forecast returns on capital: 2020E CFROI(2)
Fore
cast F
Y2
-FY
3 s
ale
s g
row
th
Bubble size and label represent 2020E EV/EBITDA
Ab
ove
me
dia
n g
row
th
Be
low
me
dia
n g
row
th
Above median profitability Below median profitability
GR
OW
TH
PROFITABILITY
(2) FY2 CFROI based on consensus EPS estimates and HOLT.
Restaurants: 18.1x
Consumer Staples: 11.3x
Information Technology: 14.1x
Consumer Discretionary: 8.8x
Communication Services: 8.9x
Health Care: 13.5x
Energy: 5.1x
Industrials: 9.2x
Materials: 7.5x
3%
4%
5%
6%
7%
8%
9%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Quadrant median
FY2 EV/EBITDA :
16.0x
Quadrant median
FY2 EV/EBITDA :
7.6x
median 2020E CFROI: 11.1%
median sales growth: 4.4%
Companies Mentioned (Price as of 21-Jun-2019)
Chipotle Mexican Grill, Inc. (CMG.N, $726.85) Domino’s Pizza Inc. (DPZ.N, $280.33) Dunkin’ Brands Group, Inc. (DNKN.OQ, $79.54) Jack in the Box Inc. (JACK.OQ, $85.08) McDonald’s Corporation (MCD.N, $204.26) Papa John’s International, Inc. (PZZA.OQ, $44.37) Restaurant Brands International Inc (QSR.N, $69.99) Shake Shack (SHAK.N, $66.75)
Starbucks Corporation (SBUX.OQ, $83.82) The Wendy’s Company (WEN.OQ, $19.37) Yum! Brands, Inc. (YUM.N, $110.27)
Disclosure Appendix
Analyst Certification
I, Lauren Silberman, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
As of December 10, 2012 Analysts’ stock rating are defined as follows:
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Rating Versus universe (%) Of which banking clients (%)
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Neutral/Hold* 39% (28% banking clients)
Underperform/Sell* 13% (22% banking clients)
Restricted 2%
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See the Companies Mentioned section for full company names
Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): YUM.N, QSR.N
Credit Suisse provided investment banking services to the subject company (YUM.N, QSR.N) within the past 12 months.
Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): MCD.N
Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): YUM.N, QSR.N
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (YUM.N, WEN.OQ, QSR.N, DPZ.N, DNKN.OQ) within the next 3 months.
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This research report is authored by:
Credit Suisse Securities (USA) LLC .............................................................................................................................................. Lauren Silberman
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