THERE IS NO MORE DOWNSIDE

Transcription

1 HOWARD PENNEY SHAYNE LAIDLAW THERE IS NO MORE DOWNSIDE BEST IDEA: LONG MCDONALD S (MCD) July 8, 2015 HEDGEYE 1

2 DISCLAIMER DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more details please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at HEDGEYE 2

3 PLEASE SUBMIT QUESTIONS TO HEDGEYE 3

4 HEDGEYE RESTAURANT IDEAS LIST LONG LIST TRADE TREND TAIL SHORT LIST TRADE TREND TAIL LONG SHORT YUM Yum! Brands - BOJA Bojangles' X X X ZOES Zoe's Kitchen - SHAK Shake Shack - X X MCD McDonald's - - DFRG Del Frisco's Rest. Group X X X CMG Chipotle Mexican Grill CHUY Chuy's Holdings X X - PNRA Panera Bread Company - SONC Sonic X X - LONG BENCH SHORT BENCH LONG SHORT PLKI Popeyes Louisiana Kitchen WEN Wendy's KKD Krispy Kreme Doughnuts HABT Habit Restaurants CBRL Cracker Barrel JACK Jack In The Box DRI Darden Restaurants Bench = timing is not right, or research is in progress. HEDGEYE 4

5 KEY POINTS 1 THE WORST IS BEHIND US MCD has hit the bottom, there is little, if any downside left in the stock. Global same-store sales have been declining for the better part of two years, and have begun to flatten. Management has admitted the mistakes of the past, and have a good plan in place, now they just need to execute! 2 3 PUTTING THE CUSTOMER FIRST The customer experience is vital to the success of McDonald s. MCD is optimizing the menu by decreasing the number of items, improving the products, developing new products, adjusting pricing and creating more excitement around the food. Additionally, management has set out to modernize the interaction customers have with MCD, increasing the curb appeal of the restaurant and adding technology to the experience. LOWERING THE COST STRUCTURE Re-shaping the operating divisions, refranchising 3,500 stores, closing another 700, lowering the number of menu items and cutting G&A will greatly simplify and lower the cost structure of the business. The benefits to the P&L will begin to emerge in 3Q15 earnings report. At the same time, we will begin to see top line sales trends benefit from the sales driven initiatives. HEDGEYE 5

6 EXECUTIVE SUMMARY

7 COMPANY OVERVIEW McDonald s is the once-small burger joint that undoubtedly has become one of the world s most recognizable brands. McDonald s offers a range of food menu items including hamburgers and cheeseburgers, fish, chicken, french fries, salads, sundaes and assorted beverages. McDonald s has restaurants located in over 100 countries around the globe, with 36,290 restaurants. Headquartered in Oak Brook, IL.; founded by Ray Kroc in Predictable, stable cash generation provided by a largely franchised model and real estate ownership. Management stated they own 45% of the land and 70% of the buildings globally, 75% of EBITDA is from royalties and rent payments. Currently, 81% of the restaurants are franchised, with a goal to move to a 90% franchise system MCD receives two payments from franchisees, Royalty (~4% of sales) and Rent (~9% of sales, when MCD owns the real estate) Four Reportable Geographic Segments: 1. United States: 40% of 2014 operating income 2. International Lead Markets: 40% of 2014 operating income 3. High Growth Markets: 10% of 2014 operating income 4. Foundational Markets: 10% of 2014 operating income Strong legacy management team with an activist mindset Data Source: Company filings. HEDGEYE 7

8 FINANCIAL SUMMARY ($ in millions except per share information) McDonald's (MCD) Financials Last Price (as of 7/7/2015) $96.68 % of 52 week high 95% Shares Outstanding 959 Market Capitalization $92,669 - Cash $1,635 + Debt $14,292 + Minority Interest $0 Enterprise Value $105, LTM Mar '15 Revenue $27,006 $27,567 $28,106 $27,441 $26,700 Growth (%) 2.1% 2.0% (2.4%) (2.7%) EBITDA $9,708 $9,850 $10,080 $9,442 $9,140 Growth (%) 1.5% 2.3% (6.3%) (3.2%) Net Income $5,503 $5,465 $5,586 $4,758 $4,365 Growth (%) (0.7%) 2.2% (14.8%) (8.3%) EPS $5.27 $5.36 $5.55 $4.82 $4.45 Growth (%) 1.7% 3.5% (13.2%) (7.7%) Data Source: Company filings, FactSet. HEDGEYE 8

9 FY2014 RESTAURANTS FRANCHISE VERSUS COMPANY OWNED BY SEGMENT Franchised Restaurants by Segment Other Countries & Corporate Franchise 9% United States Owned 4% Europe Owned 6% APMEAOwned 8% Other Countries & Corporate Owned 1% Owned Restaurants by Segment Other Countries & Corporate Franchise 9% United States Owned 4% Europe Owned 6% APMEA Owned 8% Other Countries & Corporate Owned 1% APMEA Franchise 21% APMEA Franchise 21% Europe Franchise 16% United States Franchise 35% Europe Franshise 16% United States Franchise 35% 29,556 Franchised Restaurants (81%) Data Source: Company filings. *Percentages in pie charts represent percentage of total system-wide restaurants. 6,734 Owned Restaurants (19%) HEDGEYE 9

10 FY2014 REVENUE / SOP BY SEGMENT FY2014 Revenue by Segment FY2014 Segment Operating Profit Other Countries & Corporate 5% APMEA 23% U.S. 32% Other Countries & Corporate 1% APMEA 14% U.S. 44% Europe 40% Europe 41% $27,441 million FY2014 Revenue $7,949 million FY2014 SOP Data Source: Company filings. HEDGEYE 10

11 RECENT PERFORMANCE

12 MCD HAS BEEN UNDERPERFORMING Quick Service Relative Performance vs SPX 1 Week 1 Month 3 Months 6 Months 1 Year NDLS 4.4% ZOES 28.2% TAST 27.0% TAST 37.5% PZZA 74.7% PZZA 1.7% PZZA 13.0% PZZA 23.5% PZZA 36.4% DPZ 49.2% DNKN 1.7% KKD 12.3% ZOES 20.2% ZOES 33.4% TAST 42.4% ZOES 1.3% PLKI 9.0% SHAK 17.8% SBUX 31.9% SBUX 34.8% CMG 1.2% TAST 6.9% DNKN 16.8% DNKN 29.8% PLKI 30.8% TAST 1.1% SBUX 6.3% YUM 15.1% YUM 24.0% SONC 21.0% PNRA 1.0% DNKN 6.0% SBUX 14.6% DPZ 19.7% JMBA 19.2% SBUX 1.0% DPZ 5.9% DPZ 12.5% WEN 17.2% WEN 19.1% PLKI 0.6% NDLS 5.2% PNRA 9.2% PLKI 5.4% DNKN 15.7% PBPB 0.4% YUM 2.5% JMBA 2.5% SONC 2.2% KKD 14.7% DPZ 0.0% MCD 1.5% PLKI -0.4% MCD 1.6% PNRA 11.2% MCD -0.1% CMG 0.5% ARCO -1.9% PNRA -0.4% YUM 6.1% JMBA -0.4% JMBA 0.4% MCD -1.9% JMBA -0.5% CMG -3.1% YUM -0.7% PNRA -2.1% WEN -2.5% KKD -3.2% MCD -10.6% KKD -1.7% WEN -3.6% HABT -2.7% PBPB -3.7% PBPB -27.5% HABT -2.1% SONC -5.4% KKD -3.9% HABT -3.8% GMCR -47.9% SHAK -3.9% HABT -9.1% CMG -6.7% ARCO -11.0% NDLS -61.9% SONC -4.4% PBPB -9.6% PBPB -9.2% CMG -11.8% ARCO -62.3% WEN -4.8% ARCO -10.3% SONC -11.9% NDLS -43.5% GMCR -6.4% GMCR -14.9% NDLS -14.0% GMCR -46.3% ARCO -12.2% SHAK -26.9% GMCR -35.8% SPX (1.6%) SPX (1.8%) SPX 0.0% SPX 0.5% SPX 5.5% Source: FactSet >1 STDEV ABOVE MEAN <1 STDEV BELOW MEAN HEDGEYE RISK MANAGEMENT % Change in Consensus Estimates: Next Fiscal Year EPS Quick Service 1-week 1-month 3-months 6-months The Habit Restaurants, Inc. HABT 0% 0.0% 34% 54% Potbelly Corp. PBPB 0% 0.0% 8% 16% Sonic Corp. SONC 0% 0.3% 0% 9% El Pollo Loco Holdings, Inc. LOCO 0% 0.0% 0% 5% Jack in the Box, Inc. JACK 0% 0.0% 1% 5% Starbucks Corp. SBUX 0% 0.1% 0% 1% Domino's Pizza, Inc. DPZ 0% 0.1% 1% 0% Fiesta Restaurant Group, Inc. FRGI 0% 0.0% 0% 0% Carrols Restaurant Group, Inc. TAST 0% 0.0% 0% 0% Arcos Dorados Holdings, Inc. ARCO 0% 0.0% 0% 0% Shake Shack, Inc. SHAK 2% 1.9% 144% 0% Chipotle Mexican Grill, Inc. CMG 0% 0.0% 1% 0% Popeyes Louisiana Kitchen, Inc. PLKI 0% 0.0% 1% -1% Papa John's International, Inc. PZZA 0% 0.0% 1% -1% Krispy Kreme Doughnuts, Inc. KKD 0% 0.7% 1% -2% Yum! Brands, Inc. YUM 0% 0.1% 1% -2% Zoe's Kitchen, Inc. ZOES 0% -3.4% 37% -3% Panera Bread Co. PNRA 0% 0.0% -1% -7% Keurig Green Mountain, Inc. GMCR 0% -1.0% -10% -12% McDonald's Corp. MCD 0% -0.2% -5% -14% The Wendy's Co. WEN 0% -1.4% -4% -18% Noodles & Co. NDLS 0% 0.1% -16% -25% Restaurant Brands International, Inc. QSR 0% -0.4% 2% -56% Quick Service 0.1% 0.2% 13.7% 6.4% Source: FactSet HEDGEYE RISK MANAGEMENT Data Source: FactSet, updated on 7/7/15. HEDGEYE 12

13 PRICE PERFORMANCE Year 3 - Year MCD underperformed its peers by 56% during the period MCD underperformed the S&P 500 by 28% during the period 0 07/06/10 07/06/11 07/06/12 07/06/13 07/06/14 07/06/15 (INDEX) MCD COMP SET (INDEX) MCD (INDEX) S&P /06/12 07/06/13 (INDEX) MCD COMP SET 07/06/14 (INDEX) MCD 07/06/15 (INDEX) S&P Year 3 - Months MCD underperformed its peers by 39% during the period MCD underperformed the S&P 500 by 30% during the period MCD underperformed its peers by 24% during the period MCD underperformed the S&P 500 by 9% during the period 40 07/04/14 10/04/14 01/04/15 04/04/15 07/04/15 (INDEX) MCD COMP SET (INDEX) MCD (INDEX) S&P 500 Data Source: FactSet. Comp set includes: YUM, SONC, QSR, WEN, JACK, DNKN, SBUX MCD underperformed its peers by 11% during the period MCD matched the S&P 500 during the period 90 04/06/15 05/06/15 06/06/15 07/06/15 (INDEX) MCD COMP SET (INDEX) MCD (INDEX) S&P 500 HEDGEYE 13

14 FINANCIAL OVERVIEW

15 HISTORICAL SALES PERFORMANCE 5-yr CAGR: 4.6% 4-yr CAGR: -3.2% $30 FY2006-FY2016E CAGR: 1.2% $25 $20 $21.6 $22.8 $23.5 $22.7 $24.1 $27.0 $27.6 $28.1 $27.4 $25.0 $24.2 Billions $15 $10 $5 $0 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E Data Source: FactSet, Consensus Metrix. HEDGEYE 15

16 SYSTEM WIDE SALES GROWTH 13.0% 11.0% 9.0% 7.0% 5.0% 3.0% 1.0% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 (1.0%) (3.0%) (5.0%) Sales Growth Data Source: FactSet, Company Filings. HEDGEYE 16

17 MONTHLY SSS BY REGION 15% Global 25% U.S. 10% 20% 15% 5% 10% 0% 5% -5% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 0% -5% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15-10% 20% MCD Global SSS Two-Year Average -10% Europe 15% MCD U.S. SSS APMEA Two-Year Average 15% 10% 10% 5% 5% 0% 0% -5% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15-5% -10% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15-10% Data Source: Company Filings. MCD Europe SSS Two-Year Average -15% MCD APMEA SSS Two-Year Average HEDGEYE 17

18 HISTORICAL EBITDA PERFORMANCE $12 FY2006-FY2016E CAGR: 4.5% $10 $8 $7.49 $7.77 $8.58 $9.71 $9.85 $10.08 $9.44 $8.81 $9.18 Billions $6 $5.90 $6.75 $4 $2 $0 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E Data Source: FactSet, Consensus Metrix. HEDGEYE 18

19 OPERATING INCOME GROWTH 21% 18% 15% 12% 9% 6% 3% 0% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15-3% -6% -9% -12% EBIT Growth Data Source: FactSet, Company Filings. HEDGEYE 19

20 Millions CASH FLOW FREE CASH FLOW HAS BEEN STEADY $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% $0 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Mar '15 LTM Net Operating Cash Flow Capital Expenditures Free Cash Flow Free Cash Flow Growth (%) -15% Data Source: FactSet. HEDGEYE 20

21 HISTORICAL EPS PERFORMANCE 4-yr CAGR: -0.9% $6 FY2006-FY2016E CAGR: 6.2% $5 $5.27 $5.36 $5.55 $5.18 $4 $3.76 $4.11 $4.58 $4.82 $4.76 Billions $3 $2.83 $2 $1.92 $1 $0 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E Data Source: Factset, Consensus Metrix. HEDGEYE 21

22 DIVIDEND PER SHARE $4 $4 $3 $3.12 $3.28 $3.47 $3.74 $3 $2.53 $2.87 Billions $2 $2.05 $2.26 $2 $1.50 $1.63 $1 $1.00 $1 $0 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E Data Source: Factset, Consensus Metrix. HEDGEYE 22

23 SHARES OUTSTANDING 1,400 0% Shares Outstanding in Millions 1,200 1, ,252 1,212 1,146 1,107 1,080 1,045 1,020 1, % -2% -3% -4% -5% 0 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E -6% Diluted Shares Outstanding YoY Change Data Source: Factset, Consensus Metrix. HEDGEYE 23

24 RETURN ON INCREMENTAL INVESTED CAPITAL THE COMPANY HAS TAKEN CRITICAL STEPS TO GROW ROIIC 60% 50% 50% 40% 29.1% 31.5% 32.9% 22.9% 30.7% 40% 30% ROIIC 30% 20% 10% 0% 10.0% 5.2% 5.6% 0.4% (3.4%) (12.1%) % 10% 0% -10% -20% YoY Price Change % -10% -30% -20% ROIIC % Price Change -40% -30% -50% Data Source: Company filings, Factset. HEDGEYE 24

25 MARGIN TRENDS

26 RESTAURANT LEVEL MARGINS $1,200 25% $1, % 20.0% 17.6% 19.1% 18.7% 20% Restaurant level margins are leveling off and will begin to increase in 3Q15 Restaurant Level Profit $800 $600 $400 $200 $0 16.2% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 '11A '11A '11A '11A '12A '12A '12A '12A'13A'13A'13A'13A'14A'14A'14A'14A'15A'15E'15E'15E'16E'16E'16E'16E 16.1% 15.7% 14.3% 15.7% 14.7% 16.3% 15% 10% 5% 0% % Margin In the U.S., store closures and small menus will benefit this line in 2H15 and 2016 Globally, with all the operational improvements being made to the restaurants, we expect this to start to tick upward and land in the mid-to-high teens range over time Restaurant Level Profit Restaurant Level Margins (% of Company Revenue) Data Source: Consensus Metrix. HEDGEYE 26

27 G&A AS A % OF SALES G&A in millions $680 $660 $640 $620 $600 $580 $560 $540 $520 $500 $ % 8.1% 9.1% 8.7% 9.0% G&A 7.6% 9.3% 8.2% G&A Margin 9.8% 8.9% 9.8% 8.9% 12% 10% 8% 6% 4% 2% 0% G&A Margin The consensus is expecting G&A as a % of sales to increase slightly We believe this is where the street is wrong and consensus numbers are too high in 2016 We expect further G&A cuts to be announced as management has time to work through the turnaround and find opportunities Data Source: Consensus Metrix. HEDGEYE 27

28 OPERATING MARGIN (EBIT) EBIT $3,000 $2,500 $2,000 $1,500 $1,000 $ % 33.4% 30.0% 32.0% 29.5% 33.0% 28.9% 29.7% 26.5% 30.8% 29.2% 33.5% 40% 35% 30% 25% 20% 15% 10% 5% Operating Margin Operating Margins should see an acceleration as they franchise more stores, making for more profitable and predictable royalty income $0 0% EBIT Operating Margin Data Source: Consensus Metrix. HEDGEYE 28

29 MACRO ENVIRONMENT

30 UNIVERSITY OF MICHIGAN CONSUMER CONFIDENCE U Mich Consumer Index 3 Month Moving Average 6 Month Moving Average Source: University of Michigan, FactSet Data Source: University of Michigan, FactSet. Updated on 7/1/2015. HEDGEYE RISK MANAGEMENT HEDGEYE 30

31 U.S. PERSONAL INCOME YOY SA /31/ /30/1995 3/29/1996 7/31/ /29/1996 3/31/1997 7/31/ /28/1997 3/31/1998 7/31/ /30/1998 3/31/1999 7/30/ /30/1999 3/31/2000 7/31/ /30/2000 3/30/2001 7/31/ /30/2001 3/29/2002 7/31/ /29/2002 3/31/2003 7/31/ /28/2003 3/31/2004 7/30/ /30/2004 3/31/2005 7/29/ /30/2005 3/31/2006 7/31/ /30/2006 3/30/2007 7/31/ /30/2007 3/31/2008 7/31/ /28/2008 3/31/2009 7/31/ /30/2009 3/31/2010 7/30/ /30/2010 3/31/2011 7/29/ /30/2011 3/30/2012 7/31/ /30/2012 3/29/2013 7/31/ /29/2013 3/31/2014 7/31/ /28/2014 3/31/ US Personal Income 3 Month Moving Average 6 Month Moving Average Source: Bureau of Economic Analysis, FactSet Data Source: Bureau of Economic Analysis, FactSet. Updated on 7/1/2015. HEDGEYE RISK MANAGEMENT HEDGEYE 31

32 NATIONAL DAILY AVG. GASOLINE PRICE $3.80 $3.60 $3.40 $3.20 $3.00 $2.80 $2.60 $2.40 $2.20 $2.00 Source: U.S. Department of Energy Gasoline Prices 3 Month Moving Average 6 Month Moving Average HEDGEYE RISK MANAGEMENT Data Source: U.S. Department of Energy, FactSet, updated on 7/1/15. HEDGEYE 32

33 EMPLOYMENT GROWTH BY AGE Employment Growth by Age Bucket YOA YOA YOA YOA YOA May % 3.42% 0.77% 0.27% 2.61% Apr % 3.17% 0.51% 0.36% 3.52% Mar % 2.64% 0.46% 0.50% 2.63% Feb % 2.59% 0.22% 1.33% 1.96% Jan % 2.57% 0.34% 1.04% 3.38% Dec % 2.48% 0.82% 0.71% 3.59% Nov % 2.63% 1.06% 0.26% 3.78% Oct % 3.25% 1.38% 0.98% 3.54% Sep % 2.46% 0.88% 0.29% 3.59% Aug % 2.57% 0.55% 0.64% 2.61% Jul % 2.19% 0.38% 0.23% 2.74% Jun % 2.34% 1.19% 0.15% 2.74% May % 1.37% 0.47% -0.11% 2.72% Apr % 1.84% 0.89% -0.09% 1.98% Mar % 2.25% 1.13% -0.12% 1.43% Feb % 2.50% 1.66% -1.14% 1.74% Jan % 2.22% 1.94% -0.58% 0.89% Dec % 1.50% 0.74% -0.88% 0.52% Nov % 1.50% 0.56% -0.55% 1.15% Oct % 0.78% -0.47% -1.75% 0.95% Sep % 1.62% 0.35% -1.28% 1.72% Aug % 1.80% 0.64% -1.18% 2.57% Jul % 2.00% 0.67% -0.94% 3.48% Jun % 1.80% 0.30% -0.87% 2.10% May % 2.06% 0.59% -1.22% 2.76% Data Source: Bureau of Labor Statistics, Hedgeye. HEDGEYE 33

34 INDUSTRY OVERVIEW

35 HOW DOES MCD STACK UP Data Source: FactSet. HEDGEYE 35

36 COMPETITION SSS OVERVIEW MCD HAS GIVEN UP SHARE, AND IT IS ABOUT TO TAKE IT BACK 14% 12% 10% 8% 6% 4% 2% CONSENSUS METRIX ESTIMATES 0% -2% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E -4% -6% MCD USA SSS JIB System-Wide SSS WEN System-Wide SSS SONC System-Wide SSS Data Source: Consensus Metrix. HEDGEYE 36

37 MCD SENTIMENT

38 SHORT INTEREST LOW ON AN ABSOLUTE BASIS BUT PESSIMISM IS GROWING Data Source: FactSet. Updated on 7/1/2015. HEDGEYE 38

39 ANALYST RATINGS ONLY 29% RATE IT AS A BUY Data Source: FactSet. Updated on 7/1/2015. HEDGEYE 39

40 EARNINGS REVISIONS EPS ESTIMATES HAVE BOTTOMED Data Source: FactSet. Updated on 7/1/2015. HEDGEYE 40

41 EV / NTM EBITDA 9/16/10 3/10/11 9/01/11 2/23/12 8/16/12 McDonald s 2/07/13 +1 STD -1 STD Average EV/EBITDA EV/EBITDA Sandwich Category Competitors (QSR, JACK, MCD, PLKI, SONC, WEN, YUM) 8/01/13 1/23/14 7/17/14 1/08/15 13x 12x 11x 10x 9x 8x 7/02/15 16x 14x 12x 10x 8x 3/10/11 9/01/11 2/23/12 8/16/12 2/07/13 8/01/13 1/23/14 7/17/14 1/08/15 6x 7/02/15 +1 STD -1 STD Average EV/EBITDA EV/EBITDA Data Source: FactSet, Hedgeye. HEDGEYE 41

42 ORIGINAL SHORT THESIS

43 ORIGINAL SHORT CALL ON 3/14/13 MCD FLYING TOO CLOSE TO THE SUN SSS Deteriorating on a global basis Same-store sales were on a steep decline leading into this call, since then they have continued to fade Self-inflicted wounds Operational complexity, Plan-to-Win passed its expiration date, shortage of new ideas to maintain comp momentum Increasing competition in QSR Burger chains with all different value and quality propositions started popping up catching MCD by surprise Rapidly changing consumer preferences Consumers are more aware of what they are putting into their bodies, they don t want the biggest servings, they want responsibly sourced Millennial Appeal Millennials love to spend money eating out, the brand was getting too old to stay relevant Europe going from bad to worse European economics were in a downward spiral and continue to have troubled areas HEDGEYE 43

44 PERFORMANCE SINCE 3/14/13 BETTER TO BE OUT OF IT THAN IN IT SINCE THEN Competitive Set: YUM SONC QSR WEN JACK DNKN SBUX Underperformed the S&P 500 by ~26% during the period Underperformed the peer set by ~40% during the period 80 (INDEX) MCD Comp Set (INDEX) MCD (INDEX) S&P 500 Data Source: FactSet. HEDGEYE 44

45 WHY DO WE BELIEVE IN MCDONALD S NOW? New Leadership admitting mistakes of the past Steve Easterbrook is leading the charge and is defiant on fixing mistakes of the past Menu Simplification / Innovation / Quality Shrinking the menu down to a more favorable size for the consumer and employees leads to greater food quality Customer Experience Technology Adoption Modernizing the store front while bringing in technology like mobile ordering and self-order kiosks in store Bring back the value and convenience MCD is a value brand and in the last few years, they got away from that, now they are bringing it back Refranchise / Restaurant Closures Pruning the network is crucial at this stage, there are underperforming locations soaking up vital capex dollars and dragging on the SSS metric HEDGEYE 45

46 LEADERSHIP

47 STRONG MANAGEMENT TEAM TALENTED EXECUTIVES LEADING THE COMPANY IN THE RIGHT DIRECTION Steve Easterbrook: President and CEO Has spent over 20 years with McDonald s having served as Financial Reporting Manager, CEO of McDonald s UK, President of McDonald s Europe, and Global Chief Branding Officer. Before his Tenure with McDonald s, Easterbrook led PizzaExpress and Wagamama, two restaurant chains based in the UK. Jose Armario: EVP, Worldwide Supply Chain, Development & Franchising Joined McDonald s in Previously served as Group President of McDonald s Canada and Latin America while also overseeing international franchising. He is also the former President of McDonald s Latin America, International Relationship Partner for Latin America and President of McDonald s Chile. On the BoD of USG Corporation, and serves on the Chicago Council of Global Affairs. J.C. Gonzalez-Mendez: Senior VP, Global Inclusion, Community Engagement and Philanthropy Current President and CEO of the Ronald McDonald House Charities. J.C. has a long track record of positions with McDonald s spanning over 30 years. He started in 1984 as the first employee for McDonald s Mexico, where he was responsible for establishing the supply sources for the first restaurant in Mexico. Serves on several advisory boards and is very involved in the Latin-American Community. Kevin Ozan: EVP, CFO Past Senior VP and Controller for McDonald s. Joined McDonald s in 1997, prior to which he was an Audit and M&A Professional at Ernst and Young. Serves on the BoD s for Ronald McDonald House Charities of Chicagoland and Northwest Indiana. Peter Bensen: Chief Administrative Officer Former CFO of McDonald s, where he has been for almost 20 years. He has also served the company as Director of Financial Accounting and Reporting, Vice President, and Assistant Controller. Before McDonald s, Bensen was a Senior Manager for Ernst & Young Chicago. Director of Catamaran Corporation Richard Floersch: EVP, Chief Human Resources Officer Previously served in this role for Kraft Foods prior to joining with McDonald s, and was VP of Corporate Compensation at Philip Morris. Currently, he is Vice Chairman of The HR Policy Association. He also sits on the BoD for Skills for Chicagoland s Future. Data Source: Company filings. Atif Rafiq: Senior VP and Global Digital Officer Joined McDonald s in 2014, prior to which he had held several high level management positions at a number of internet and software companies. He was most recently the General Manager of Kindle Direct Publishing at Amazon.com. Previously, he held several positions in marketing and strategy for Yahoo!. Founding member of the business development and corporate strategy team at AOL. Gloria Santona: EVP, General Counsel and Secretary Diverse legal background at McDonald s. Served as U.S. General Counsel and Secretary before stepping into her current position. Sits on BoD s for Aon, Constitutional Rights Foundation of Chicago, and The Chicago Network. HEDGEYE 47

48 REGIONAL EXECUTIVES TALENTED EXECUTIVES LEADING THE COMPANY IN THE RIGHT DIRECTION Mike Andres: President, McDonald s U.S. Began his 30 year long career at McDonald s by managing a family owned restaurant in CA. He has since held several leadership roles at the company, including President and CEO of Boston Market when it was a subsidiary of McDonald s. He briefly left MCD to become the Chairman and CEO of Logan s Roadhouse, only to return in 2014 to assume his current position. Dave Hoffman: President, High Growth Markets Dave was appointed to his current role in Previously, he served as the Senior VP and restaurant support officer for APMEA region. He started at McDonald s in 1984 as a restaurant employee. After college, he joined Arthur Anderson & Co. After business school, he returned to McDonald s through the franchising department s internship program. He climbed the ladder at MCD through various promotions in strategy and execution roles. Doug Goare: President, International Lead Markets Began his career with McDonald s nearly 40 years ago, and has served in a number of upper level management roles including President of McDonald s Europe, and EVP of Worldwide Supply Chain and Development. Ian Borden: President, Foundational Markets Borden has been with McDonald s for more than 20 years, having started in the finance department at McDonald s Canada. He has been in many positions including CFO for McDonald s APMEA, and Managing Director for McDonald s Ukraine. Data Source: Company filings. HEDGEYE 48

49 MCD BY BUSINESS SEGMENT

50 UNITED STATES Overview The U.S. region is very much focused on improving the McDonald s experience for its customers. With an increased emphasis on operations excellence, lead by technology There are 14,339 system-wide restaurants in the United States, of which 12,840 are franchised (89.5%) U.S. segment represents 32% of total revenues In 2014, the region opened 222 new restaurants and reimaged about 260, of which a majority added or enhanced drive-thru capacity Currently about half of the restaurants interiors and exteriors reflect the contemporary design Consensus is way too bearish on the future margin structure. As you turn to the next page and look at Europe's restaurant level margins, we at Hedgeye believe in a trajectory similar to that, one that levels off going into the 2H of FY15 is more likely for the U.S. Company Commentary U.S. results remain disappointing, working on implementing a more efficient operating structure, simplifying the menu Guest counts were down as customer-focused initiatives did not resonate strongly amid the increasingly competitive marketplace and sluggish industry growth In 2014, brought in new leadership to provide innovative thinking and a fresh strategic perspective, and announced actions to create a flatter, more nimble organizational structure Improvements Being Made New training: rolling out new training program to improve order accuracy and reduce complaints Drive-thru: represents 70% of U.S. sales, rolling out simplified drive-thru menu that cuts the number of items by 50%, completed by end of July Menu: focus on continued growth at breakfast, which remains MCD s strongest daypart, and an ongoing emphasis on core food and beverages Marketing: executing initiatives to build brand trust through strengthened marketing efforts, including the launch of a national food quality campaign Data Source: Company Filings, Consensus Metrix. 10% 8% 6% 4% 2% 0% -2% -4% Data: CF, CM Same-Restaurant Sales Growth United States SRS Two-Year Avg. 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 Restaurant Level Margin 2Q15E 3Q15E 4Q15E 1Q16E YoY BPS Chg. U.S. Restaurant Level Margin Avg. LTM 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E HEDGEYE 22% 20% 18% 16% 14% % Data: CF, CM HEDGEYE HEDGEYE 50

51 EUROPE Overview There are 7,864 System-wide restaurants in the Europe region, of which 5,770 are franchised (73.4%) European segment represents 40% of total revenues The UK, France, Russia and Germany collectively account for 68% of Europe s revenue In 2014, the region reimaged about 260 restaurants, and by the end of the year nearly 100% of interiors and 85% of exteriors were modernized A vast majority of poor performance in this region is attributable to the difficult operating environment in Russia and Ukraine Company Commentary UK remains very strong the market has been able to sustain positive momentum, with 36 consecutive quarters of sales, operating income and cash flow growth France is maintaining market share despite tough economic headwinds and weak consumer confidence Germany is showing early signs of a turnaround as negative comparable sales trends have moderated the last two quarters Improvements Being Made In 2014, just as in the U.S., Europe pursued customer-focused initiatives to deliver menu variety, contemporary experience and value enhancements Further optimized the menu through premium menu additions and expanded McCafé platform with over 4,000 restaurants now serving blended ice beverages Continue to invest in current restaurants through reimaging and technology enhancements Adopting technology well in Europe, with over 2,000 self-order kiosks and mobile ordering and payment capabilities available in certain markets (90% of restaurants in France have Kiosks) Implementing more targeted and integrated value strategy with Germany s value reset project The UK is sharing best practices on order accuracy Data Source: Company Filings, Consensus Metrix. 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% 1Q11 2Q11 Data: CF, CM Same-Restaurant Sales Growth 3Q Data: CF, CM 4Q11 1Q12 2Q12 3Q12 Europe SRS 4Q12 1Q13 2Q13 3Q13 4Q13 Two-Year Avg. 1Q14 2Q14 3Q14 4Q14 Restaurant Level Margin 1Q15 2Q15E 3Q15E 4Q15E 1Q16E HEDGEYE YoY BPS Chg. Europe Restaurant Level Margin Avg. LTM 22% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E 21% 20% 19% 18% 17% 16% HEDGEYE HEDGEYE 51

52 APMEA Overview There are 10,385 System-wide restaurants in the APMEA region, of which 7,503 are franchised (72.2%) APMEA segment represents 23% of total revenues China, Australia and Japan (a 50%-owned affiliate accounted for under the equity method), collectively account for 52% of APMEA s revenue Improvements Being Made Currently in the early stages of turning around the business in the region Meaningful enhancements to the menu, including both core menu items and new items across several categories, value platforms and better restaurant operations Australia currently leading the field in the region and globally in the development of Experience of the Future with the successful rollout of Create Your Taste Management Commentary APMEA s Q1 FY15 comp sales declined 8.3% and had the largest impact on global performance, with Japan and China posting declines of 32.3% and 4.8%, respectively While these results are partly due to the lingering impact of the supplier issue in the region, Japan s performance reflects the broad-based consumer perception challenges that the market is working to overcome Sales trends in China continued to show sequential improvement through the quarter Australia remains a bright spot, posting its third consecutive quarter of positive comparable sales Data Source: Company Filings, Consensus Metrix. 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% Data: CF, CM Same-Restaurant Sales Growth APMEA SRS Two-Year Avg. 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E Restaurant Level Margin HEDGEYE YoY BPS Chg. APMEA Restaurant Level Margin Avg. LTM % % % 0 14% % % % % Data: CF, CM HEDGEYE 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E HEDGEYE 52

53 THE NEW SEGMENT STRUCTURE STARTED JULY 1, 2015 U.S. International Lead Markets High Growth Markets Foundational Markets Company s largest segment, accounting for more than 40% of the company s 2014 operating income Australia, Canada, France, Germany and UK Operate within similar economic and competitive dynamics, offer similar growth opportunities Collectively represent about 40% of 2014 operating income China, Italy, Poland, Russia, South Korea, Spain, Switzerland, Netherlands These markets represent relatively higher restaurant expansion and franchise potential These markets accounted for about 10% of operating income in 2014 The remaining markets in MCD s system represents about 100 countries Each of which has the potential to operate under a largely franchised model Corporate activities will also be reported within this segment Data Source: Company Filings. HEDGEYE 53

54 TURNAROUND PLAN: IT S NOT LIKE PEOPLE AREN T EATING BURGERS ANYMORE

55 MANAGEMENT ADMITTING MISTAKES We moved away from the Dollar Menu for a variety of reasons. And that in itself is not necessarily the wrong thing to do, but we didn t replace it with sufficient enough value in the eyes of the consumer to enable that transition to go without getting some resistance from the customer on that Stephen Easterbrook (Bernstein May Conference 2015) I can tell you our product mix inside-out, by restaurant, by 30 minutes, by item. What I can t tell you is who we re selling it to. We haven t got that one-on-one connectivity. The minute people start to engage with us through what s current in the mobile phone, our ability to understand them, their behaviors, and what they care about is just magnified many, many multiple times Stephen Easterbrook (Bernstein May Conference 2015) Data Source: Bernstein Strategic Decisions Conference. HEDGEYE 55

56 HITTING ROCK BOTTOM 6/15 MCD WAS ON NATIONAL TV SUPPORTING THE VALUE MESSAGE FIRST SIGN OF FRANCHISEE UNITY 20% 2013, took the McDouble off the Dollar Menu 15% 10% 2003, the Dollar Menu was introduced 2H 2012, took the small fries off the Dollar Menu 2015, stopped nationally advertising the value message 5% 0% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15-5% MCD U.S. SSS Two-Year Average Data Source: Company Filings, Hedgeye Research. HEDGEYE 56

57 WHAT IS THE CEO THINKING ABOUT? STEVE EASTERBROOK S HOLISTIC FOCUS ON MAKING MCD A BETTER COMPANY: 1. Understanding and correcting the mistakes of the past. 2. Be more agile in responding to customer s evolving taste preferences and needs. 3. Make quicker decisions and spread global insights faster to drive incremental growth. 4. Streamline operating structure to change the way MCD makes decisions. 5. Identify and focus the organization to better support the most significant global markets that will drive growth overall. HEDGEYE 57

58 STEPHEN EASTERBROOK HE S TAKING THE BULL BY THE HORNS I m honest and fair and don t dispense forced kindness Where we need to fix fundamentals, we need to act now, and where we need to make an impact, I m not looking for incremental steps I hold people accountable for tangible actions and outputs and I can assure you that I hold myself accountable to these same high standards We need to be the best at knowing what matters most to consumers, and we will focus our best talent and prioritize spending where it will optimally support our turnaround We will try new things, move fast with what works and even faster from what doesn t We re making the business more responsive to market conditions by using our scale advantage more effectively, we cannot afford to carry legacy attitudes and legacy thinking, and we won t Data Source: Company filings. HEDGEYE 58

59 RETURNING TO CORE VALUES QUALITY SERVICE CLEANLINESS VALUE HEDGEYE 59

60 TACTICALLY, HOW DO THEY RETURN TO GROWTH? 1 Optimize the menu to offer customers their favorite food & drinks Shrink the menu, improve existing products, develop new products, adjust pricing, create more excitement about the food 2 Transformation of the customer service experience Modernizing the interaction between MCD and the customer to create a memorable experience 3 Refranchise and close stores Eliminate underperforming stores to cut costs and improve profitability, leading to improved industry metrics 4 Manage complexity of restaurant operations With everything management has added to the restaurants, it was getting too complex, keep it simple New training programs for employees to improve accuracy and experience for the customer and employee 5 Financial strings to pull Refranchising and store closures must lead to sizeable SG&A savings at corporate Financial engineering, potential to lever up and buy back more shares or increase the dividend Reduce capital spending HEDGEYE 60

61 TACTICALLY, HOW DO THEY RETURN TO GROWTH? 1 Optimize the menu to offer customers their favorite food & drinks Shrink the menu, improve existing products, develop new products, adjust pricing, create more excitement about the food 2 Transformation of the customer service experience Modernizing the interaction between MCD and the customer to create a memorable experience 3 Refranchise and close stores Eliminate underperforming stores to cut costs and improve profitability, leading to improved industry metrics 4 Manage complexity of restaurant operations With everything management has added to the restaurants, it was getting too complex, keep it simple New training programs for employees to improve accuracy and experience for the customer and employee 5 Financial strings to pull Refranchising and store closures must lead to sizeable SG&A savings at corporate Financial engineering, potential to lever up and buy back more shares or increase the dividend Reduce capital spending HEDGEYE 61

62 FOCUS ON THE FOOD IF THE FOOD ISN T GOOD, ALL THE OTHER WORK WILL BE FOR NOTHING Improve Current Products Antibiotic free chicken by 2017 Milk in happy meals will be free of artificial growth hormones Rainforest alliance coffee 100% breast meat chicken nuggets Toasting buns for longer to deliver hotter sandwiches, searing the beef differently to deliver juicier burgers Focused on improving chicken and beef options Create New Products Menu Simplification In January, began the process of downsizing the menu to optimize restaurant performance Slashing slow moving items to improve service times, accuracy and overall restaurant performance Reduced Extra Value Meal offerings from 16 to 11 Quarter pounder with cheese had its versions cut from four to one Snack wraps were reduced from three versions to one Create Your Taste Bring Back the Value Support for LTO s & Promotions Higher price point, for customers looking for a premium product Greater flexibility given to the customer Improves the customer experience and gives MCD the ability to compete better in the marketplace Now available in Australia (800 stores), Singapore and the U.S. (20 stores currently) Will expand to 2,000 U.S. restaurants by the end of 2015 TasteCrafted, a less capital intensive and available through drive-thru alternative is also being tested in select cities in the U.S. Bringing back the Premium Chicken Selects, nationally available, $2.99 for three pieces Sirloin Burger, nationally available for $4.99 Premium toppings such as guacamole Localization Lobster rolls in Boston Pressure cooked chicken in Atlanta Spirit of Kentucky burger, with bourbonflavored sauce Simmental beef and Wilde Küche in Europe This is one of the main reasons customers come to McDonald s Management has drifted from the value message and is now returning to it National participation and advertising for $2.50 for McDouble and small fries In France, MCD launched McFirst, a new three-item value meal that includes a sandwich, a side and a drink for 4.95 Re-launch of Loose Change Menu in Australia Monopoly Big Mac celebration Making better use of marketing dollars and better balancing the overall spend at a local and national level New national brand campaigns complemented by local advertising that will be more responsive to individual market preferences Data Source: Company filings, Hedgeye Research. HEDGEYE 62

63 SHRINK THE MENU STRONG CORRELATION SEEN BETWEEN INCREASING MENU SIZE AND DECREASING COMPS McDonald's Burger King Jack In The Box Menu Items % 4% 2% 0% -2% -4% SSS % Menu Items % 2% 0% -2% -4% -6% SSS % Menu Items % 2% 0% -2% -4% -6% SSS % Menu U.S. SSS Menu U.S. & Canada SSS Menu SSS Wendy's Sonic Dunkin' Donuts Menu Items % 2% 0% SSS % Menu Items % % 4% 2% 0% -2% -4% -6% -8% -10% SSS % Menu Items % 5% 4% 3% 2% 1% 0% SSS % Menu SSS Menu SSS Menu SSS Data Source: Restaurant Research. HEDGEYE 63

64 NEW PRODUCTS AND LTO S CREATING EXCITEMENT AROUND THESE ITEMS IS CRUCIAL, MORE ISN T ALWAYS BETTER New Products & LTO's McDonald's New Products and LTO's U.S. SSS 6% 4% 2% 0% -2% -4% SSS % New Products & LTO's Burger King New Products and LTO's 4% 2% 0% -2% -4% -6% SSS % New Products & LTO's Jack In The Box New Products and LTO's 2014 SSS 4% 2% 0% -2% -4% -6% SSS % New Products & LTO's Wendy's New Products and LTO's SSS 3% 2% 1% 0% -1% SSS % New Products & LTO's Sonic New Products and LTO's SSS 6% 4% 2% 0% -2% -4% -6% -8% -10% SSS % New Products & LTO's Dunkin' Donuts New Products and LTO's 41 SSS 6% 5% 4% 3% 2% 1% 0% SSS % Data Source: Restaurant Research. HEDGEYE 64

65 BRING BACK THE VALUE MCD HAS GOTTEN AWAY FROM PROVIDING VALUE McDonald's Burger King Jack in the Box Avg. Check $6.3 $6.2 $6.1 $6.0 $5.9 $5.8 $5.7 $5.6 $5.5 $6.20 $6.00 $5.85 $5.75 $ % 4% 2% 0% -2% -4% SSS % Avg. Check $6.4 $6.2 $6.0 $5.8 $5.6 $5.4 $6.30 $6.15 $5.75 $5.75 $ % 2% 0% -2% -4% -6% SSS % Avg. Check $7.0 $6.8 $6.6 $6.4 $6.2 $6.0 $5.8 $6.83 $6.39 $6.48 $6.15 $ % 2% 0% -2% -4% -6% SSS % Avg. Check U.S. SSS Avg. Check U.S. & Canada SSS Avg. Check SSS Wendy's Sonic Dunkin' Donuts Avg. Check $7.0 $6.8 $6.6 $6.4 $6.2 $6.0 $5.8 $6.85 $6.65 $6.40 $6.50 $ Avg. Check SSS 4% 2% 0% -2% SSS % Avg. Check $7 $6 $5 $4 $3 $2 $1 $0 $5.69 $5.93 $6.05 $5.00 $ Avg. Check SSS 6% 4% 2% 0% -2% -4% -6% -8% -10% SSS % Avg. Check $4.8 $4.7 $4.6 $4.5 $4.4 $4.3 $4.2 $4.1 $4.0 $4.75 $4.60 $4.50 $4.50 $ Avg. Check SSS 6% 4% 2% 0% SSS % Data Source: Restaurant Research. HEDGEYE 65

66 TRANSFORMING THE CUSTOMER EXPERIENCE COULD YOU IMAGINE THIS SERVICE IN THE STATES? Experience of the Future Australia is pioneering the Experience of the Future concept for MCD with Create Your Taste, setting the trend for markets around the world to follow Additionally, they have been speedy to roll out table service, self-order kiosks and many food improvements MCD has stated that it will expand Create Your Taste to 2,000 restaurants across the U.S. by the end of 2015 Currently available in the U.S. (limited), Australia and Singapore (limited) Create Your Taste provides customers with many options, and premium cook to order quality Choices are bountiful, you can get a artisan bun, a ciabatta roll or a lettuce wrap, utilizing a quarter-pound 100% USDA beef patty that is cooked to order, as well as many cheese and topping options such as; shaved parmesan, bacon, grilled pineapple, guacamole, grilled onions, etc. I encourage you to make your own burger online (similar to self-order kiosk experience) to see how easy it is: I would argue it is much easier than ordering in person Data Source: Photographer Steve Lunum / McDonald s Corp. via Bloomberg. Photo taken at MCD restaurant in Martin Place in downtown Sydney. HEDGEYE 66

67 SHORTER DRIVE-THRU MENU INCREASES SPEED AND CONVENIENCE Drive-thru accounts for 70% of sales in the U.S. Extending side-by-side drive-thru s to 500 more locations in the U.S. in the coming months Canada is adding side-by-side drive-thru s to more restaurants, by the end of 2015 about two-thirds of Canada will benefit from these enhancements Eliminated 16 EVM 1/4lb and McWrap options And better organized Data Source: Company Filings, Hedgeye Research. HEDGEYE 67

68 TACTICALLY, HOW DO THEY RETURN TO GROWTH? 1 Optimize the menu to offer customers their favorite food & drinks Shrink the menu, improve existing products, develop new products, adjust pricing, create more excitement about the food 2 Transformation of the customer service experience Modernizing the interaction between MCD and the customer to create a memorable experience 3 Refranchise and close stores Eliminate underperforming stores to cut costs and improve profitability, leading to improved industry metrics 4 Manage complexity of restaurant operations With everything management has added to the restaurants, it was getting too complex, keep it simple New training programs for employees to improve accuracy and experience for the customer and employee 5 Financial strings to pull Refranchising and store closures must lead to sizeable SG&A savings at corporate Financial engineering, potential to lever up and buy back more shares or increase the dividend Reduce capital spending HEDGEYE 68

69 IMPROVE THE CUSTOMERS INTERACTION WITH THE BRAND MODERNIZING THE INTERACTION WITH THE BRAND IS THE KEY TO STAYING RELEVANT Restaurant Modernization Modernizing the restaurant is key to staying relevant now and in the future Internationally, this is more apparent than in the U.S., as many customers internationally like to sit and eat, enjoying time with friends while the U.S. is more a grab and go customer (U.S. is 70% drivethru) MCD has been working diligently on upgrading restaurants interiors and exteriors around the world, one of the biggest improvements being made in Canada is two-lane drive-thru s Scaling multiple order-point strategies such as Self order kiosks, mobile ordering & pay, web order, delivery & table service Self-Order Kiosks Takes people out of ordering line, reducing lines Provides crew more time in the kitchen to cook everything to a higher quality Striking difference seen in quality of food in stores with kiosks versus without Substantial labor savings after full adoption of the system and time for customers to get acquainted 90% of French restaurants have kiosks Delivery Expansion Testing new distribution channels such as delivery in NYC with partner, Postmates In Asian markets, delivery is a substantial business, approaching $1bn Table delivery provides a premium service associated with Create Your Taste, and makes paying the premium price more acceptable for the customer because they feel special Mobile App / Web Launching mobile app in Q3 FY15 to build more personal relationship with the customer Steve Easterbrook stated, I can tell you product mix by restaurant in 30 minute increments, what I can't tell you is who we're selling it to. Technology will help this. App will not initially enable mobile ordering, that will come later, possibly in FY16, along with mobile payments, loyalty program and customized marketing Raising the Minimum Wage Happier employees = a better experience for customers MCD to raise minimum wage at company owned stores, still unclear how many franchisees will follow suit Data Source: Company Filings, Hedgeye Research. HEDGEYE 69

70 IMPROVEMENTS TO THE PROCESS SIDE BY SIDE DRIVE-THRU S AND DELIVERY (Netherlands) (United States) (Delivery in Japan) Data Source: Hedgeye Research. HEDGEYE 70

71 TACTICALLY, HOW DO THEY RETURN TO GROWTH? 1 Optimize the menu to offer customers their favorite food & drinks Shrink the menu, improve existing products, develop new products, adjust pricing, create more excitement about the food 2 Transformation of the customer service experience Modernizing the interaction between MCD and the customer to create a memorable experience 3 Refranchise and close stores Eliminate underperforming stores to cut costs and improve profitability, leading to improved industry metrics 4 Manage complexity of restaurant operations With everything management has added to the restaurants, it was getting too complex, keep it simple New training programs for employees to improve accuracy and experience for the customer and employee 5 Financial strings to pull Refranchising and store closures must lead to sizeable SG&A savings at corporate Financial engineering, potential to lever up and buy back more shares or increase the dividend Reduce capital spending HEDGEYE 71

72 CLOSE STORES AND REFRANCHISE Refranchise Accelerating refranchising efforts moving from the current 81% franchise model to 90% franchise by 2018, which equates to roughly 3,500 restaurants across all four segments Significant increase to previous plan to refranchise 1,500 restaurants from 2014 to 2016 Will strengthen the business on many levels, less capex, less SG&A and restaurants in the hands of local entrepreneurial franchisees Intend to keep 10% company owned restaurants to test products and systems, which makes MCD a more reliable business operator Refranchising will lead to: More stable, predictable revenue and cash flow streams, the ability to unleash entrepreneurial spirit, more risk taking and more innovation across the system as management places even more restaurants in the hands of the best franchisees In some segments, such as certain Asian markets, MCD will exit their company-operated presence entirely, moving to a 100% franchise structure Specifically, MCD is looking for a franchisee to run its 413 Taiwan stores, which have been company operated since entering the market roughly 30 years ago Store Closures Shutting down 700 stores globally in 2015, primarily in Japan, China and the U.S. Japan has been hit especially hard by the supplier issues with SSS down 32.3% in Q1 FY15 From a corporate structure perspective, it costs roughly $45,000 to $50,000 to operate each store, so if you assume simple math, these cuts will save them roughly $35mm in G&A at corporate Data Source: Company Filings, Hedgeye Research. HEDGEYE 72

73 TACTICALLY, HOW DO THEY RETURN TO GROWTH? 1 Optimize the menu to offer customers their favorite food & drinks Shrink the menu, improve existing products, develop new products, adjust pricing, create more excitement about the food 2 Transformation of the customer service experience Modernizing the interaction between MCD and the customer to create a memorable experience 3 Refranchise and close stores Eliminate underperforming stores to cut costs and improve profitability, leading to improved industry metrics 4 Manage complexity of restaurant operations With everything management has added to the restaurants, it was getting too complex, keep it simple New training programs for employees to improve accuracy and experience for the customer and employee 5 Financial strings to pull Refranchising and store closures must lead to sizeable SG&A savings at corporate Financial engineering, potential to lever up and buy back more shares or increase the dividend Reduce capital spending HEDGEYE 73

74 MANAGING COMPLEXITY MAKING MCD AN EFFICIENT / ENJOYABLE PLACE TO WORK Simplicity This gets back to Steve Easterbrook s comment, My overall vision is for McDonald s to be seen as a modern progressive burger company delivering a contemporary customer experience Simplicity is a key to success, both from the customer interaction side to execution of delicious food every time Making the business simple will make MCD more agile, being able to respond quicker to market conditions and customer preferences, using the scale advantage to the best of their ability From the corporate structure they are removing layers of complexity, at a local level they are removing menu items and variations to those items in order to speed up the cooking process, and ease inventory processes The intention is all to create a better place to be, whether you are working or dining, McDonald s should be an enjoyable experience, and if the back-of-house is not in order, this falls apart Customer Satisfaction In the most recent survey printed June 30, 2015, MCD received the worst overall satisfaction score out of the limited-service restaurants category both this year and last year, it can not get worse, MCD will only go up from here Tied for the most negative YoY change in satisfaction score with Domino s and Wendy s at -6%, Burger King also dropped 5% Data Source: Company filings, American Customer Satisfaction Index, Hedgeye Research. HEDGEYE 74

75 TACTICALLY, HOW DO THEY RETURN TO GROWTH? 1 Optimize the menu to offer customers their favorite food & drinks Shrink the menu, improve existing products, develop new products, adjust pricing, create more excitement about the food 2 Transformation of the customer service experience Modernizing the interaction between MCD and the customer to create a memorable experience 3 Refranchise and close stores Eliminate underperforming stores to cut costs and improve profitability, leading to improved industry metrics 4 Manage complexity of restaurant operations With everything management has added to the restaurants, it was getting too complex, keep it simple New training programs for employees to improve accuracy and experience for the customer and employee 5 Financial strings to pull Refranchising and store closures must lead to sizeable SG&A savings at corporate Financial engineering, potential to lever up and buy back more shares or increase the dividend Reduce capital spending HEDGEYE 75

76 COST REDUCTIONS / FINANCIAL ENGINEERING G&A Cuts Within the first two months of becoming CEO, Steve Easterbrook identified $300 million in G&A savings. I suspect that this is just the beginning and there is more cuts to come as the story unfolds The $300 million in announced cuts should be realized by the end of While this is a good start, there is more that the company can do to streamline operations and I believe the new shareholder base will be pressing the company to do more Financial Engineering MCD has also announced that it expects to return $8 billion to $9 billion to shareholders in FY15 through a combination of dividends and share repurchases. As a result, by 2016 the company will have returned close to $20 billion to shareholders between 2014 and 2016 MCD s balance sheet is conservatively managed with a target ratio of 1.5x net debt to EBITDA. The company is currently running at 1.4x, but will be higher at the end of this fiscal year given the recently announced share repurchase program. There is clearly room for the company to take on more leverage and increase shareholder value MCD YUM SONC WEN JACK DNKN SBUX Average Net Debt/EBITDA 1.38x 0.97x 2.71x 2.73x 2.08x 5.42x 0.05x 2.19x REIT A REIT is not a logical option for MCD, owning real estate is vital to their process and makes for a very solid predictable revenue stream Data Source: FactSet, Company Filings, Hedgeye Research. HEDGEYE 76

77 SBUX CAPEX REDUCTION LEADS TO EBITDA GROWTH EBITDA / CAPEX Relationship Quarterly ROIIC & Price Return $1,600 50% 300% 30% $1,400 40% 250% 25% $1,200 $1,000 $800 $600 $400 $200 $0 30% 20% 10% 0% -10% -20% 200% 150% 100% 50% 0% -50% Dec-00 Oct-01 Aug-02 Jun-03 Apr-04 Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10 Oct-11 Aug-12 Jun-13 Apr-14 Feb-15 20% 15% 10% 5% 0% -5% -10% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E CAPEX EBITDA YoY Growth -100% -150% ROIIC Quarterly Price Return -15% -20% Data Source: FactSet, Company Filings, Hedgeye Research. HEDGEYE 77

78 $3,250 $3,000 $2,750 $2,500 $2,250 $2,000 $1,750 $1,500 $1,250 $1,000 MCD CAPEX REDUCTION LEADS TO EBITDA GROWTH $750 $500 $250 $0 FY00 FY01 EBITDA / CAPEX Relationship FY02 FY03 FY04 FY05 FY06 FY07 CAPEX Actuals FY08 FY09 CAPEX Street Estimates EBITDA Street Estimates FY10 FY11 FY12 FY13 FY14 *CAPEX is calculated on an LTM basis for each quarter end Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 CAPEX Hedgeye Estimates Q4 FY16 EBITDA YoY Change Actuals EBITDA Hedgeye Estimates 20% 15% 10% 5% 0% -5% -10% -15% 200% 150% 100% 50% 0% -50% -100% Dec-00 Quarterly ROIIC & Price Return Oct-01 Aug-02 Jun-03 Apr-04 Feb-05 Dec-05 ROIIC Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10 Oct-11 Quarterly Price Return Aug-12 Jun-13 Apr-14 Feb-15 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Data Source: FactSet, Company Filings, Hedgeye Research. HEDGEYE 78

79 WE ARE STILL SEEING PLENTY OF COMPETITION

80 CONSUMERS HAVE A LOT OF OPTIONS MCD WAS CAUGHT OFF GUARD BY THE COMPETITION, BUT NOW THEY HAVE THEIR HEAD BACK IN THE GAME HEDGEYE 80

81 MCD HAS GIVEN UP SHARE AND THEY ARE ABOUT TO TAKE IT BACK 14% 12% CONSENSUS METRIX ESTIMATES 10% 8% 6% 4% 2% 0% -2% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E -4% -6% MCD USA SSS JIB System-Wide SSS WEN System-Wide SSS SONC System-Wide SSS Data Source: Consensus Metrix. HEDGEYE 81

82 BULLISH CALL ON MCD = BEARISH ON COMPETITION

83 GOING SHORT SONC, JACK & WEN Market share gains will slow over the next 12-months With MCD going full force into turnaround mode, it s going to be tougher than ever to compete Same-Store sales will begin to reflect MCD s new value push MCD is just at the beginning of their turnaround, we expect that by the Q3 timeframe, MCD could start to see positive SSS growth in the U.S., especially given the easy comp for the quarter (-3.3% U.S. SSS in Q3 FY14) Valuations are at all-time highs Valuations for these brands have ran up and reached a peak, will they crash and burn or fizzle slowly? Overall sentiment is bullish on the name as a group Sentiment is very bullish on the names and rightfully so, but the analysts are sleeping at the wheel, as MCD is coming right at them ready to steal their growth HEDGEYE 83

84 SONC: SUMMARY OVERVIEW Sonic Corp. $ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION (FY ends Dec.) NTM 2015E 2016E 2017E (Consensus in mm) NTM FY2015E FY2016E Stock Price $ Hedgeye EPS $1.24 $1.09 $1.23 $1.36 Sales $ $606.7 $635.0 Shares Outstanding 52.0 % Chg YoY -11.5% 13.0% 10.0% % Chg YoY -3.8% 4.7% Market Cap $ 1,445.1 Consensus $1.24 $1.09 $1.26 $1.41 EBITDA $ $163.9 $ Net Debt $ % Chg YoY -11.5% 15.4% 11.6% % Chg YoY 16.0% 7.8% + Preferred Equity $ - Variance % 0.0% -2.1% -3.5% EBITDA Margin* 27.7% 27.0% 27.8% + Minority Interest $ - P/E 21.5X 24.4X 21.5X 19.5X EV/EBITDA 10.8X 11.5X 10.6X Enterprise Value $ 1,878.6 INVESTMENT POSITIVES INVESTMENT NEGATIVES NTM EBITDA $ ) Strong super regional brand 1) Increased competition/negative traffic in 2016 NTM EV/EBITDA 10.8x 2) Good business model 2) SSS and margins have peaked NTM EPS $ ) Current momentum is strong 3) Bullish bias/low Short Interest NTM P/E 22.5x 4) Valuation 1X Turn $ 3.36 Upside/Downside 12.1% Source: Factset, Company Filings *Consensus EBITDA Margin HEDGEYE RISK MANAGEMENT Data Source: FactSet, Hedgeye Research. HEDGEYE 84

85 SONC: VALUATION MORE DOWNSIDE AS THE MULTIPLE CONTRACTS EBITDA NTM EV/EBITDA Multiple 9.7x 9.8x 10.0x 10.1x 10.2x 10.3x 10.4x 10.5x 10.6x 10.7x 10.8x 10.9x $168 $22.98 $23.31 $23.95 $24.28 $24.60 $24.92 $25.25 $25.57 $25.89 $26.21 $26.54 $26.86 $170 $23.30 $23.62 $24.28 $24.60 $24.93 $25.25 $25.58 $25.91 $26.23 $26.56 $26.89 $27.21 $171 $23.61 $23.94 $24.60 $24.93 $25.26 $25.59 $25.92 $26.25 $26.58 $26.91 $27.24 $27.57 $173 $23.93 $24.27 $24.93 $25.26 $25.60 $25.93 $26.26 $26.60 $26.93 $27.26 $27.59 $27.93 $175 $24.26 $24.59 $25.26 $25.60 $25.94 $26.27 $26.61 $26.94 $27.28 $27.62 $27.95 $28.29 $176 $24.58 $24.92 $25.60 $25.94 $26.28 $26.62 $26.96 $27.30 $27.64 $27.98 $28.32 $28.65 $178 $24.91 $25.25 $25.94 $26.28 $26.63 $26.97 $27.31 $27.65 $28.00 $28.34 $28.68 $29.02 $180 $25.24 $25.59 $26.28 $26.63 $26.98 $27.32 $27.67 $28.01 $28.36 $28.71 $29.05 $29.40 $182 $25.58 $25.93 $26.63 $26.98 $27.33 $27.68 $28.03 $28.38 $28.73 $29.08 $29.43 $29.78 BEAR BASE BULL -17% -5% 7% Data Source: Hedgeye Research. HEDGEYE 85

86 SONC: SAME-STORE SALES SSS HAVE PEAKED Consensus Estimates Hedgeye Estimates 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% System-Wide SSS 2Y Average -4% System-Wide SSS 2Y Average Data: CF, Consensus Estimates HEDGEYE Data: CF, Consensus Estimates HEDGEYE Data Source: Consensus Metrix, Hedgeye Research. HEDGEYE 86

87 SONC: WHAT ARE THE STREET S THOUGHTS SONC HAS HAD A GREAT RUN Sell-Side Sentiment Short Interest Data Source: FactSet, Hedgeye Research. HEDGEYE 87

88 JACK: SUMMARY OVERVIEW Jack in the Box Inc. $ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION (FY ends Dec.) NTM 2015E 2016E 2017E (Consensus in mm) NTM FY2015E FY2016E Stock Price $ Hedgeye EPS $3.37 $2.99 $3.38 $3.75 Sales $1, $1,543.4 $1,644.6 Shares Outstanding 37.4 % Chg YoY -11.4% 13.0% 11.0% % Chg YoY -4.8% 6.6% Market Cap $ 3,269.7 Consensus $3.37 $2.99 $3.49 $4.02 EBITDA $ $291.3 $ Net Debt $ % Chg YoY 16.9% 15.1% % Chg YoY 11.1% 10.7% + Preferred Equity $ - Variance % 0.0% -3.3% -6.8% EBITDA Margin* 19.4% 18.9% 19.6% + Minority Interest $ - P/E 24.9X 28.3X 24.9X 22.3X EV/EBITDA 12.3X 13.3X 12.0X Enterprise Value $ 3,863.2 INVESTMENT POSITIVES INVESTMENT NEGATIVES NTM EBITDA $ ) Strong operating model 1) Increased competition NTM EV/EBITDA 12.3x 2) Potential for the spin off of Qdoba 2) SSS in FY2Q15 was the peak for this cycle NTM EPS $ ) Strong Management 3) Little room for further margin improvement NTM P/E 25.9x 4) Valuation is extended & low short interest 1X Turn $ 8.43 Upside/Downside 9.6% Source: Factset, Company Filings *Consensus EBITDA Margin HEDGEYE RISK MANAGEMENT Data Source: FactSet, Hedgeye Research. HEDGEYE 88

89 JACK: VALUATION EBITDA NTM EV/EBITDA Multiple 10.0x 10.2x 10.4x 10.6x 10.8x 11.0x 11.2x 11.4x 11.6x 11.8x 12.0x 12.2x $303 $65.16 $66.78 $68.40 $70.03 $71.65 $73.27 $74.89 $76.51 $78.13 $79.75 $81.37 $82.99 $306 $65.97 $67.61 $69.25 $70.88 $72.52 $74.16 $75.80 $77.43 $79.07 $80.71 $82.34 $83.98 $309 $66.79 $68.45 $70.10 $71.75 $73.41 $75.06 $76.71 $78.37 $80.02 $81.67 $83.33 $84.98 $312 $67.62 $69.29 $70.96 $72.63 $74.30 $75.97 $77.64 $79.31 $80.98 $82.65 $84.32 $85.99 $315 $68.45 $70.14 $71.83 $73.51 $75.20 $76.89 $78.57 $80.26 $81.95 $83.63 $85.32 $87.01 $318 $69.30 $71.00 $72.70 $74.41 $76.11 $77.81 $79.52 $81.22 $82.92 $84.63 $86.33 $88.04 $322 $70.15 $71.87 $73.59 $75.31 $77.03 $78.75 $80.47 $82.19 $83.91 $85.63 $87.35 $89.07 $325 $71.01 $72.75 $74.48 $76.22 $77.96 $79.70 $81.44 $83.17 $84.91 $86.65 $88.39 $90.12 $328 $71.88 $73.63 $75.39 $77.14 $78.90 $80.65 $82.41 $84.16 $85.92 $87.67 $89.43 $91.18 BEAR BASE BULL -26% -12% 4% Data Source: Hedgeye Research. HEDGEYE 89

90 JACK: SAME-STORE SALES JACK IN THE BOX SSS, EXCLUDES QDOBA Consensus Estimates Hedgeye Estimates 10% 8% 6% 4% 2% 0% -2% -4% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 10% 8% 6% 4% 2% 0% -2% -4% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E -6% JIB System SSS Two-Year Avg. -6% JIB System SSS Two-Year Avg. Data: CF, CM Estimates HEDGEYE Data: CF, CM Estimates HEDGEYE Data Source: Consensus Metrix, Hedgeye Research. HEDGEYE 90

91 JACK: WHAT ARE THE STREET S THOUGHTS OVERVIEW Sell-Side Sentiment Short Interest Data Source: FactSet, Hedgeye Research. HEDGEYE 91

92 WEN: SUMMARY OVERVIEW Wendy's Company $ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION (FY ends Dec.) NTM 2015E 2016E 2017E (Consensus in mm) NTM FY2015E FY2016E Stock Price $ Hedgeye EPS $0.33 $0.32 $0.35 $0.39 Sales $1, $1,785.1 $1,208.8 Shares Outstanding % Chg YoY -4.4% 10.0% 11.0% % Chg YoY -13.4% -32.3% Market Cap $ 3,921.7 Consensus $0.33 $0.32 $0.35 $0.41 EBITDA $ $391.7 $ Net Debt $ 1,168.1 % Chg YoY -4.4% 8.9% 19.2% % Chg YoY 0.4% -3.1% + Preferred Equity $ - Variance % 0.0% 1.0% -6.0% EBITDA Margin* 25.9% 21.9% 31.4% + Minority Interest $ - P/E 31.4X 32.8X 29.8X 26.7X EV/EBITDA 13.2X 13.0X 13.4X Enterprise Value $ 5,089.9 INVESTMENT POSITIVES INVESTMENT NEGATIVES NTM EBITDA $ ) The "NEW" Asset light business model 1) Increased competition NTM EV/EBITDA 13.2x 2) Strong management 2) The financial engineering story has played out NTM EPS $ ) Great Brand 3) Slowing same-store sales NTM P/E 32.4x 3) Bearish Bias 4) Valuation 1X Turn $ 1.06 Upside/Downside 9.8% Source: Factset, Company Filings *Consensus EBITDA Margin HEDGEYE RISK MANAGEMENT Data Source: FactSet, Hedgeye Research. HEDGEYE 92

93 WEN: VALUATION EBITDA NTM EV/EBITDA Multiple 12.0x 12.2x 12.4x 12.6x 12.8x 13.0x 13.1x 13.2x 13.3x 13.4x 13.5x 13.6x $370 $9.02 $9.22 $9.42 $9.63 $9.83 $10.03 $10.14 $10.24 $10.34 $10.44 $10.54 $10.65 $374 $9.14 $9.34 $9.55 $9.76 $9.96 $10.17 $10.27 $10.37 $10.48 $10.58 $10.68 $10.78 $378 $9.26 $9.47 $9.68 $9.89 $10.09 $10.30 $10.41 $10.51 $10.61 $10.72 $10.82 $10.92 $382 $9.39 $9.60 $9.81 $10.02 $10.23 $10.44 $10.54 $10.65 $10.75 $10.86 $10.96 $11.07 $385 $9.51 $9.72 $9.94 $10.15 $10.36 $10.57 $10.68 $10.78 $10.89 $11.00 $11.10 $11.21 $389 $9.64 $9.85 $10.07 $10.28 $10.50 $10.71 $10.82 $10.92 $11.03 $11.14 $11.25 $11.35 $393 $9.77 $9.98 $10.20 $10.42 $10.63 $10.85 $10.96 $11.07 $11.17 $11.28 $11.39 $11.50 $397 $9.90 $10.12 $10.33 $10.55 $10.77 $10.99 $11.10 $11.21 $11.32 $11.43 $11.54 $11.65 $401 $10.03 $10.25 $10.47 $10.69 $10.91 $11.13 $11.24 $11.35 $11.46 $11.57 $11.68 $11.79 BEAR BASE BULL -16% -2% 9% Data Source: Hedgeye Research. HEDGEYE 93

94 WEN: SAME-STORE SALES SSS WILL TREND DOWN AS MCD EXECUTES TURNAROUND Consensus Estimates Hedgeye Estimates 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% System-Wide SSS Two-Year Avg. -2% System-Wide SSS Two-Year Avg. Data: CF, CM Estimates HEDGEYE -3% Data: CF, CM Estimates HEDGEYE Data Source: Consensus Metrix, Hedgeye Research. HEDGEYE 94

95 WEN: WHAT ARE THE STREET S THOUGHTS Sell-Side Sentiment Short Interest Data Source: FactSet, Hedgeye Research. HEDGEYE 95

96 COMMODITIES

97 USDA BEEF WHOLESALE VALUE BEEF PRICES ON THE RISE, BEGINNING TO TAPER OFF Cents per pound Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Beef Wholesale Value Data Source: USDA. HEDGEYE 97

98 CHICKEN AND EGGS BUREAU OF LABOR STATISTICS RETAIL PRICES $2.30 $2.20 $2.10 $2.00 $1.90 $1.80 $1.70 $1.60 $1.50 $1.40 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Chicken, Fresh Whole ($/lb) Eggs, Grade A ($/dozen) Data Source: BLS. HEDGEYE 98

99 CME CORN STEADY, OFF 52-WEEK HIGHS $5.00 $4.50 $4.00 $/bushel $3.50 $3.00 $2.50 $2.00 6/1/2014 7/1/2014 8/1/2014 9/1/ /1/ /1/ /1/2014 1/1/2015 2/1/2015 3/1/2015 4/1/2015 5/1/2015 6/1/2015 CME Corn Data Source: Mercaris. HEDGEYE 99

100 WHEAT WHEAT PRICES TRENDING DOWN $9 $8 $7 $6 $5 $4 $3 Jun-14 Jul-14 Aug-14 $/bushel Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 No. 1 hard red winter (ordinary protein), Kansas City, MO No. 2 soft red winter, Chicago, IL No. 1 soft white, Portland, OR Data Source: USDA. HEDGEYE 100

101 VALUATION