November 13, 2015 Chipotle Mexican Grill, Inc. Model Update Industry View In-Line Stock Rating Overweight Price Target $720.00 We are raising out FY17 EPS to $24.05 from $22.38 as we flow lower food costs through FY17. FY15 and FY16 EPS estimates unchanged. We are raising out FY17 EPS to $24.05 from $22.38 as we flow lower food costs through FY17. FY15 and FY16 EPS estimates unchanged. MORGAN STANLEY & CO. LLC John Glass John.Glass@morganstanley.com Courtney Yakavonis, CFA Courtney.Yakavonis@morganstanley.com Christopher E Carril Christopher.Carril@morganstanley.com Chipotle Mexican Grill, Inc. ( CMG.N, CMG US ) +1 617 856-8752 +1 617 856-8037 +1 617 856-8750 Restaurants / United States of America Stock Rating Overweight Industry View In-Line Price target $720.00 Shr price, close (Nov 12, 2015) $614.68 Mkt cap, curr (mm) $19,396 52-Week Range $758.60-594.05 Fiscal Year Ending 12/14 12/15e 12/16e 12/17e ModelWare EPS ($) 14.35 17.68 20.66 24.21 Prior ModelWare EPS - 17.71 20.65 22.53 ($) P/E 47.7 34.8 29.8 25.4 Consensus EPS ($) 14.07 17.28 20.41 24.04 Div yld (%) - - - - Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework = Consensus data is provided by Thomson Reuters Estimates e = Morgan Stanley Research estimates QUARTERLY MODELWARE EPS ($) 2015e 2015e 2016e 2016e Quarter 2014 Prior Current Prior Current Q1 2.69-4.01a 4.84 4.85 Q2 3.55-4.49a 5.22 5.25 Q3 4.20-4.66a 5.30 5.28 Q4 3.91 4.52 4.52 5.28 5.28 e = Morgan Stanley Research estimates, a = Actual Company reported data Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. 1
Risk-Reward Snapshot: Chipotle Mexican Grill, Inc. (CMG, OW, PT $720) Chipotle Mexican Grill, Inc. November 13, 2015 Risk-Reward View $ 1,000 900 800 700 600 500 400 300 200 100 Price Target $720 Bull $880 40x Bull Case 2016E EPS of $22.00 Base $720 35x Base Case 2016e EPS of $20.50 Bear $575 30x Bear Case 2016e EPS of $19.18 $705.63 $880.00 (+25%) $720.00 (+2%) $575.00 (-19%) 0 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Price Target (Oct-16) Historical Stock Performance Current Stock Price Source: Company data, Morgan Stanley Research WARNINGDONOTEDIT_RRS4RL~CMG.N~ We believe CMG can hold its LT average PE of 35x given continued comp outperformance and margin expansion opportunities. We also expect CMG's young growth concepts to support the multiple (though make no material contribution to earnings. Our DFC model (7.7% WACC and 4% terminal growth rate) also supports a ~$700 share price. Caliente: EPS upside continues driven by 7% comps and moderating commodity costs, which lift restaurant-level margins to all-time highs of ~30%; leveraging expenses such that op. margin reaches ~20% and the multiple roughly holds its average (ex the recession) despite decelerating unit growth. ShopHouse and Pizza Locale development accelerates. Suave: Our base case scenario assumes that operating margins improve ~150-200bps in the next two years on Mid-to-HSD comps, which should leverage food & labor margins, especially in a tame food cost environment. DCF supports ~$755 share price using a WACC of 7.4% and 4% terminal growth rate. Frio: EPS growth slows on sales deleveraging, as traffic growth decelerates & commodity costs continue to increase without any pricing offset, constraining store level margins. Unit growth slows. P/E still above peers on growth scarcity premium, but inline with its recession average. Investment Thesis CMG s fundamentals remain best in class, in our view with store margins at all-time highs (~29%), SSS at double digits and returns on capital increasing. SSS momentum should continue. Chipotle s strong price/value perception should continue to drive outsized traffic gains despite menu pricing in 14. Strong unit economics and large market opportunity should drive long term low double digit unit growth. The potential development of new concepts could drive above average unit growth for decades. Key Value Drivers New unit productivity and returns are industry leading and drive significant shareholder value creation. Margin expansion: Market assumes only a small increase in RLM in 15 despite HSD then MSD SSS and opportunity to fine tune labor scheduling. Use of balance sheet, with over $1.2B in cash and investments plus $500-600M in FCF, CMG could implement a more aggressive buyback. Risks to Achieving Price Target Slowing in core metrics (SSS, RLM or unit growth) could weigh on the shares given the recent multiple expansion. Food inflation Unlike peers, CMG cannot contract many of its proteins New unit productivity declines as CMG in-fills markets, it risks sales cannibalization and exposure to a lower income demographic 2
CMG's Income Statement, Balance Sheet and Cash Flow Model Exhibit 1: CMG Income Statement Model Income Statement: Chipotle Mexican Grill, Inc. Fiscal Year Ends: December ($ in millions) 2011A 2012A 2013A 1Q14A 2Q14A 3Q14A 4Q14A 2014A 1Q15A 2Q15A 3Q15A 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E Total revenue 2,269.5 2,731.2 3,214.6 904.2 1,050.1 1,084.2 1,069.8 4,108.3 1,089.0 1,197.8 1,216.9 1,208.4 4,712.2 1,273.6 1,389.3 1,405.1 1,396.6 5,464.5 1,458.6 1,586.7 1,601.4 1,587.9 6,234.5 Restaurant operating costs: Food, beverage & packaging costs 738.7 891.0 1,073.5 311.8 363.1 372.1 374.0 1,421.0 369.0 396.7 401.1 400.0 1,566.8 424.1 462.6 467.9 465.1 1,819.7 484.2 528.4 531.7 527.2 2,071.5 Labor costs 543.1 641.8 739.8 208.2 228.5 230.4 237.3 904.4 244.2 270.9 270.1 274.3 1,059.5 291.7 320.9 311.9 317.0 1,241.5 331.8 364.1 353.1 358.1 1,407.1 Occupancy costs 147.3 171.4 199.1 54.8 56.3 58.8 60.9 230.9 63.2 64.7 66.4 68.9 263.1 73.3 74.3 76.0 78.6 302.2 83.2 84.1 85.8 88.6 341.6 Other operating costs 251.2 286.6 347.4 95.1 115.4 111.0 112.7 434.2 113.5 130.4 134.9 126.9 505.7 131.5 149.8 154.3 145.2 580.9 149.9 170.3 175.1 164.4 659.6 General and administrative 149.4 183.4 203.7 66.9 74.9 71.2 60.9 273.9 63.1 70.2 70.1 70.2 273.5 69.1 75.8 87.1 80.1 312.1 81.1 88.9 85.5 92.2 347.7 Depreciation and amortization 74.9 84.1 96.1 25.8 27.0 28.0 29.8 110.5 30.6 32.4 33.1 32.9 129.1 33.7 34.6 35.5 36.7 140.5 37.5 38.4 39.3 40.5 155.8 Pre-opening 8.5 11.9 15.5 4.3 3.4 3.8 4.1 15.6 3.4 3.7 4.4 5.4 16.9 4.2 4.5 4.6 5.8 19.0 4.1 4.6 4.7 5.9 19.3 Loss on disposal of assets 5.8 5.0 6.8 1.6 1.6 1.6 2.2 7.0 4.2 1.4 2.2 1.2 8.9 1.2 1.2 1.2 1.2 4.8 1.2 1.2 1.2 1.2 4.8 Total costs and expenses 1,919.0 2,275.4 2,681.9 768.5 870.2 876.8 881.9 3,397.5 891.2 970.4 982.1 979.7 3,823.5 1,028.7 1,123.8 1,138.4 1,129.8 4,420.7 1,173.0 1,280.0 1,276.4 1,278.0 5,007.4 Income from operations 350.6 455.9 532.7 135.7 179.8 207.4 187.9 710.8 197.8 227.4 234.8 228.7 888.7 244.9 265.4 266.6 266.8 1,043.8 285.6 306.7 325.0 309.9 1,227.1 EBITDA 425.5 540.0 628.8 161.4 206.9 235.4 217.6 821.3 228.4 259.9 234.8 261.6 984.6 278.6 300.1 302.1 303.5 1184.3 323.1 345.1 364.3 350.4 1382.9 Interest income 2.1 1.8 1.8 0.7 1.1 0.8 0.9 3.5 1.2 1.7 1.5 0.9 5.4 0.9 0.9 0.9 0.9 3.6 0.9 0.9 0.9 0.9 3.6 Interest expense (2.9) - - - - - - - - - - - - - - - - - - - - - - Earnings before income taxes 349.7 457.7 534.5 136.3 181.0 208.2 188.8 714.3 199.0 229.2 236.3 229.6 894.1 245.8 266.3 267.5 267.7 1,047.4 286.5 307.6 325.9 310.8 1,230.7 Income tax expense (benefit) 134.8 179.7 207.0 53.3 70.7 77.4 67.5 268.9 76.4 89.0 91.4 89.1 345.8 95.1 103.1 103.5 103.6 405.3 111.7 120.0 127.1 121.2 480.0 Net income 214.9 278.0 327.4 83.1 110.3 130.8 121.2 445.4 122.6 140.2 144.9 140.5 548.2 150.7 163.3 164.0 164.1 642.1 174.7 187.6 198.8 189.6 750.7 Non-recurring net (1.5) - - - - - - - - - - - - - - - - - - - - - - Reported net income 213.5 278.0 327.4 83.1 110.3 130.8 121.2 445.4 122.6 140.2 144.9 140.5 548.2 150.7 163.3 164.0 164.1 642.1 174.7 187.6 198.8 189.6 750.7 Operating EPS $6.81 $8.75 $10.47 $2.64 $3.50 $4.15 $3.84 $14.13 $3.88 $4.45 $4.59 $4.48 $17.40 $4.81 $5.21 $5.24 $5.24 $20.50 $5.59 $6.01 $6.37 $6.09 $24.05 Non-recurring ($0.05) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Reported EPS $6.76 $8.75 $10.47 $2.64 $3.50 $4.15 $3.84 $14.13 $3.88 $4.45 $4.59 $4.48 $17.40 $4.81 $5.21 $5.24 $5.24 $20.50 $5.59 $6.01 $6.37 $6.09 $24.05 Diluted shares outstanding 31.8 31.8 31.3 31.5 31.5 31.5 31.5 31.5 31.6 31.5 31.5 31.4 31.5 31.3 31.3 31.3 31.3 31.3 31.3 31.2 31.2 31.2 31.2 Margin Analysis Food, beverage & packaging costs 32.5% 32.6% 33.4% 34.5% 34.6% 34.3% 35.0% 34.6% 33.9% 33.1% 33.0% 33.1% 33.2% 33.3% 33.3% 33.3% 33.3% 33.3% 33.2% 33.3% 33.2% 33.2% 33.2% Labor costs 23.9% 23.5% 23.0% 23.0% 21.8% 21.2% 22.2% 22.0% 22.4% 22.6% 22.2% 22.7% 22.5% 22.9% 23.1% 22.2% 22.7% 22.7% 22.8% 23.0% 22.1% 22.6% 22.6% Occupancy costs 6.5% 6.3% 6.2% 6.1% 5.4% 5.4% 5.7% 5.6% 5.8% 5.4% 5.5% 5.7% 5.6% 5.8% 5.4% 5.4% 5.6% 5.5% 5.7% 5.3% 5.4% 5.6% 5.5% Other operating costs 11.1% 10.5% 10.8% 10.5% 11.0% 10.2% 10.5% 10.6% 10.4% 10.9% 11.1% 10.5% 10.7% 10.3% 10.8% 11.0% 10.4% 10.6% 10.3% 10.7% 10.9% 10.4% 10.6% Restaurant-level margin 26.0% 27.1% 26.6% 25.9% 27.3% 28.8% 26.6% 27.2% 27.5% 28.0% 28.3% 28.0% 28.0% 27.7% 27.5% 28.1% 28.0% 27.8% 28.1% 27.7% 28.5% 28.3% 28.1% General and administrative 6.6% 6.7% 6.3% 7.4% 7.1% 6.6% 5.7% 6.7% 5.8% 5.9% 5.8% 5.8% 5.8% 5.4% 5.5% 6.2% 5.7% 5.7% 5.6% 5.6% 5.3% 5.8% 5.6% Depreciation and amortization 3.3% 3.1% 3.0% 2.8% 2.7% 2.6% 2.8% 2.7% 2.8% 2.7% 2.7% 2.7% 2.7% 2.6% 2.5% 2.5% 2.6% 2.6% 2.6% 2.4% 2.5% 2.6% 2.5% Pre-opening 0.4% 0.4% 0.5% 0.5% 0.3% 0.4% 0.4% 0.4% 0.3% 0.3% 0.4% 0.5% 0.4% 0.3% 0.3% 0.3% 0.4% 0.3% 0.3% 0.3% 0.3% 0.4% 0.3% Income from operations 15.4% 16.7% 16.6% 15.0% 17.1% 19.1% 17.6% 17.3% 18.2% 19.0% 19.3% 18.9% 18.9% 19.2% 19.1% 19.0% 19.1% 19.1% 19.6% 19.3% 20.3% 19.5% 19.7% EBITDA 18.7% 19.8% 19.6% 17.9% 19.7% 21.7% 20.3% 20.0% 21.0% 21.7% 19.3% 21.6% 20.9% 21.9% 21.6% 21.5% 21.7% 21.7% 22.2% 21.8% 22.7% 22.1% 22.2% Income tax provision 38.5% 39.3% 38.7% 39.1% 39.1% 37.2% 35.8% 37.6% 38.4% 39.1% 39.1% 38.8% 38.7% 38.7% 38.7% 38.7% 38.7% 38.7% 39.0% 39.0% 39.0% 39.0% 39.0% Net income 9.5% 10.2% 10.2% 9.2% 10.5% 12.1% 11.3% 10.8% 11.3% 11.7% 11.9% 11.6% 11.6% 11.8% 11.8% 11.7% 11.8% 11.7% 12.0% 11.8% 12.4% 11.9% 12.0% Year/Year % Growth Total revenue 23.6% 20.3% 17.7% 24.4% 28.6% 31.1% 26.7% 27.8% 20.4% 14.1% 12.2% 13.0% 14.7% 16.9% 16.0% 15.5% 15.6% 16.0% 14.5% 14.2% 14.0% 13.7% 14.1% Food, beverage & packaging costs 31.7% 20.6% 20.5% 30.1% 34.2% 34.1% 30.8% 32.4% 18.4% 9.2% 7.8% 7.0% 10.3% 14.9% 16.6% 16.7% 16.3% 16.1% 14.2% 14.2% 13.6% 13.4% 13.8% Labor costs 19.7% 18.2% 15.3% 21.4% 23.0% 22.1% 22.4% 22.3% 17.3% 18.5% 17.2% 15.6% 17.1% 19.5% 18.5% 15.5% 15.6% 17.2% 13.8% 13.5% 13.2% 13.0% 13.3% Occupancy costs 14.2% 16.4% 16.1% 15.2% 15.8% 17.4% 15.4% 16.0% 15.2% 15.0% 12.8% 13.0% 14.0% 15.9% 14.9% 14.4% 14.1% 14.8% 13.5% 13.1% 12.9% 12.7% 13.1% Other operating costs 23.8% 14.1% 21.2% 24.1% 33.7% 24.6% 18.2% 25.0% 19.3% 12.9% 21.6% 12.6% 16.4% 15.8% 14.9% 14.4% 14.5% 14.9% 14.0% 13.7% 13.5% 13.2% 13.6% General and administrative 26.0 % 22.7 % 11.1 % 51.4% 47.0% 35.0% 9.1% 34.4 % -5.8% -6.2% -1.6% 15.1% (0.1) % 9.6% 8.0% 24.3% 14.2% 14.1 % 17.4% 17.2% -1.7% 15.1% 11.4 % Depreciation & amortization 8.7 % 12.3 % 14.2 % 12.3% 14.5% 13.6% 19.5% 15.0 % 19.0% 20.1% 18.5% 10.5% 16.9 % 10.0% 6.7% 7.2% 11.6% 8.8 % 11.3% 11.0% 10.7% 10.4% 10.9 % Income from operations 21.8% 30.0% 16.9% 13.0% 22.8% 51.2% 45.5% 33.4% 45.8% 26.5% 13.2% 21.7% 25.0% 23.8% 16.7% 13.6% 16.7% 17.5% 16.6% 15.5% 21.9% 16.2% 17.6% Net income 20.1% 29.3% 17.8% 8.5% 25.5% 56.9% 52.3% 36.0% 47.6% 27.1% 10.8% 15.9% 23.1% 22.9% 16.5% 13.2% 16.8% 17.1% 16.0% 14.9% 21.2% 15.5% 16.9% Operating EPS 20.8% 28.4% 19.7% 7.6% 24.3% 55.6% 51.7% 35.0% 47.1% 26.9% 10.8% 16.5% 23.1% 23.9% 17.2% 14.1% 17.1% 17.8% 16.2% 15.3% 21.7% 16.0% 17.3% Unit Count Systemwide 1,230 1,409 1,588 1,630 1,673 1,715 1,772 1,772 1,819 1,866 1,917 1,982 1,982 2,032 2,087 2,142 2,212 2,212 2,262 2,317 2,372 2,442 2,442 Y/Y % Change 13.5% 14.6% 12.7% 11.9% 11.6% 11.7% 11.6% 11.6% 11.6% 11.5% 11.8% 11.9% 11.9% 11.7% 11.8% 11.7% 11.6% 11.6% 11.3% 11.0% 10.7% 10.4% 10.4% Same-store Sales SSS 11.3% 7.1% 5.6% 13.4% 17.3% 19.8% 16.1% 16.8% 10.4% 4.3% 2.6% 2.8% 5.0% 5.5% 5.0% 4.5% 5.0% 5.0% 4.0% 4.0% 4.0% 4.0% 4.0% Two-year SSS 20.6% 18.4% 12.7% 14.4% 22.8% 26.0% 25.4% 22.4% 23.8% 21.6% 22.4% 18.9% 21.8% 15.9% 9.3% 7.1% 7.8% 10.0% 9.5% 9.0% 8.5% 9.0% 9.0% Balance Sheet Data Cash and investments $584 $664 $892 $1,021 $1,109 $1,231 $1,254 $1,254 $1,422 $1,480 $1,585 $1,653 $1,653 $1,790 $1,927 $2,072 $2,143 $2,143 $2,303 $2,460 $2,634 $2,720 $2,720 Long-term Debt NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Cash Flow Data Cash From Operations $411 $420 $529 $180 $181 $189 $132 $682 $243 $158 $187 $190 $779 $237 $241 $250 $189 $917 $271 $274 $292 $217 $1,055 Capex 151 197 200 47 56 58 92 253 59 55 67 72 254 60 64 65 78 267 61 67 69 82 278 Free-cash Flow 260 223 329 133 125 132 40 429 183 103 120 118 525 177 178 185 111 650 209 208 224 136 776 Souce: Company data and Morgan Stanley Research Source: Company data, Morgan Stanley Research 3
Exhibit 2: CMG Balance Sheet Model Chipotle Mexican Grill, Inc. November 13, 2015 Fiscal Year Ends: December 2011A 2012A 2013A 1Q14A 2Q14A 3Q14A 4Q14A 2014A 1Q15A 2Q15A 3Q15A 4Q15E 2015E 2016E 2017E ASSETS Current assets: Cash 401.2 322.6 323.2 411.6 470.1 442.6 419.5 419.5 543.0 587.7 604.2 672.2 672.2 1,162.6 1,739.0 Accounts receivable, net 8.4 16.8 24.0 16.6 20.2 18.9 34.8 34.8 21.5 25.7 24.2 39.4 39.4 45.5 51.7 Notes receivable - McDonald's Corp - - - - - - - - - - - - - - - Inventory 8.9 11.1 13.0 15.2 15.5 15.9 15.3 15.3 16.1 16.5 17.5 17.0 17.0 19.6 22.2 Current deferred tax assets 6.2 8.9 13.2 13.8 14.7 15.8 19.0 19.0 19.4 20.2 20.6 20.6 20.6 20.6 20.6 Income tax receivable - 9.6 3.7 - - - 16.5 16.5-7.9 13.5 13.5 13.5 13.5 13.5 Prepaid expenses 21.4 27.4 34.2 38.2 37.0 33.6 34.8 34.8 37.3 39.7 37.8 37.8 37.8 37.8 37.8 Available for sale securities 55.0 150.3 255.0 295.4 334.6 347.0 338.6 338.6 347.6 291.5 355.6 355.6 355.6 355.6 355.6 Total current assets 501.2 546.6 666.3 790.8 892.1 873.9 878.5 878.5 984.7 989.2 1,073.2 1,155.9 1,155.9 1,655.1 2,240.3 Leasehold improvements, PP&E, net 752.0 866.7 963.2 983.0 1,011.9 1,052.7 1,107.0 1,107.0 1,119.5 1,147.1 1,181.0 1,219.1 1,219.1 1,340.6 1,458.4 Other assets 22.0 42.6 43.9 46.3 47.5 47.6 42.8 42.8 46.5 47.2 46.7 46.7 46.7 46.7 46.7 Restricted cash & cash equivalents/other Long 128.2 190.9 313.9 313.6 304.1 440.9 496.1 496.1 531.1 600.8 625.1 625.1 625.1 625.1 625.1 Long-term deferred tax assets - - - - - - - - - - - - - - - Goodwill 21.9 21.9 21.9 21.9 21.9 21.9 21.9 21.9 21.9 21.9 21.9 21.9 21.9 21.9 21.9 Total assets 1,425.3 1,668.7 2,009.3 2,155.7 2,277.6 2,437.1 2,546.3 2,546.3 2,703.7 2,806.2 2,947.9 3,068.7 3,068.7 3,689.4 4,392.4 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 46.4 58.7 59.0 66.7 77.6 88.4 69.6 69.6 76.1 81.5 77.3 77.3 77.3 89.2 100.9 Accrued payroll and benefits 60.2 71.7 67.2 56.3 86.4 78.2 73.9 73.9 67.2 93.4 80.3 82.3 82.3 90.3 98.3 Accrued liabilities 46.5 56.3 73.0 68.7 69.6 73.8 102.2 102.2 85.9 86.2 86.7 88.7 88.7 96.7 104.7 Current portion of deemed landlord financing 0.1 0.1 - - - - - - - - - - - - - Income tax payable 4.2 - - 35.5 7.9 24.6 - - 48.0 - - - - - - Total current liabilities 157.5 186.9 199.2 227.2 241.5 265.0 245.7 245.7 277.1 261.0 244.2 248.3 248.3 276.2 303.9 Deferred rent 143.3 167.1 192.7 199.5 205.3 211.9 219.4 219.4 225.9 232.7 240.7 244.7 244.7 260.7 276.7 Deemed landlord financing 3.5 3.4 - - - - - - - - - - - - - Deferred income tax liability 64.4 48.9 55.4 57.6 50.8 39.0 40.5 40.5 35.4 28.8 29.6 31.6 31.6 39.6 47.6 Other liabilities 12.4 16.5 23.6 26.3 26.9 27.4 28.3 28.3 31.0 32.0 31.9 31.9 31.9 31.9 31.9 Total liabilities 381.1 422.7 471.0 510.6 524.5 543.3 533.9 533.9 569.4 554.5 546.4 556.5 556.5 608.4 660.1 SHAREHOLDERS' EQUITY Common Stock 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Additional Paid in Capital 676.7 816.6 919.8 956.4 991.2 1,015.6 1,038.9 1,038.9 1,066.2 1,134.7 1,172.1 1,192.3 1,192.3 1,279.2 1,379.7 Accumulated other comprehensive income 0.2 1.0 1.6 1.5 2.0 0.6 (0.4) (0.4) (5.1) (3.4) (5.1) (5.1) (5.1) (5.1) (5.1) Retained Earnings 671.5 949.5 1,276.9 1,360.0 1,470.2 1,601.0 1,722.3 1,722.3 1,844.9 1,985.1 2,130.0 2,270.5 2,270.5 2,912.6 3,663.3 Treasury stock, at cost (304.4) (521.5) (660.4) (673.2) (710.7) (723.8) (748.8) (748.8) (772.0) (865.1) (895.9) (945.9) (945.9) (1,105.9) (1,305.9) Tax Receivable - McDonald's Corp - - - - - - - - - - - - - - - Total stockholders' equity 1,044.2 1,245.9 1,538.3 1,645.0 1,753.0 1,893.8 2,012.4 2,012.4 2,134.3 2,251.7 2,401.5 2,512.2 2,512.2 3,081.1 3,732.4 Total liabilities and stockholders' equity $1,425.3 $1,668.7 $2,009.3 $2,155.7 $2,277.6 $2,437.1 $2,546.3 $2,546.3 $2,703.7 $2,806.2 $2,947.9 $3,068.7 $3,068.7 $3,689.4 $4,392.4 Dupont Valuation Analysis NI/Sales 9.5% 10.2% 10.2% 9.8% 9.8% 10.4% 10.8% 10.8% 11.3% 11.6% 11.6% 11.6% 11.6% 11.7% 12.0% EBIT/Sales 15.4% 16.7% 16.6% 16.2% 16.0% 16.8% 17.3% 17.3% 18.0% 18.5% 18.5% 18.9% 18.9% 19.1% 19.7% Sales/Average Assets 1.78 1.77 1.75 1.75 1.77 1.79 1.80 1.80 1.77 1.75 1.70 1.68 1.68 1.62 1.54 Average Assets/Average Equity 1.37 1.35 1.32 1.32 1.31 1.29 1.28 1.28 1.29 1.27 1.25 1.24 1.24 1.21 1.19 ROAA 27.5% 29.5% 29.0% 28.3% 28.5% 30.0% 31.2% 31.2% 31.8% 32.3% 31.5% 31.7% 31.7% 30.9% 30.4% ROAE 23.2% 24.3% 23.5% 22.8% 22.8% 24.0% 25.1% 25.1% 25.7% 25.7% 24.6% 24.2% 24.2% 23.0% 22.0% LEVERAGE Debt to Capital Debt to TTM EBITDA Interest Coverage (TTM) 144.5X NA NA NA NA NA NA NA NA NA NA NA NA NA NA Souce: Company data and Morgan Stanley Research Source: Company Data, Morgan Stanley Research estimates Exhibit 3: CMG Cash Flow Model Fiscal Year Ends: December 2011A 1Q12A 2Q12A 3Q12A 4Q12A 2012A 1Q13A 2Q13A 3Q13A 4Q13A 2013A 1Q14A 2Q14A 3Q14A 4Q14A 2014A 1Q15A 2Q15A 3Q15A 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 2017E Cash flows from operating activities: Net Income (loss) 214.9 62.7 81.7 72.3 61.4 278.0 76.6 87.9 83.4 79.6 327.4 83.1 110.3 130.8 121.2 445.4 122.6 140.2 144.9 140.5 548.2 150.7 163.3 164.0 164.1 642.1 750.7 Adj. to reconcile net earnings to cash from operations: Depreciation & amortization 74.9 20.1 20.5 21.4 22.1 84.1 22.9 23.6 24.6 24.9 96.1 25.8 27.0 28.0 29.8 110.5 30.6 32.4 33.1 32.9 129.1 33.7 34.6 35.5 36.7 140.5 155.8 Current income tax (benefit) provision 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Deferred income tax (benefit) provision 11.3 1.8 (3.5) (4.1) (12.3) (18.1) (1.9) 9.2 (0.7) (4.5) 2.1 1.6 (7.7) (12.9) (1.6) (20.7) (5.6) (7.5) 0.5 2.0 (10.5) 2.0 2.0 2.0 2.0 8.0 8.0 Change in valuation allowance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Loss on disposal of assets 5.8 1.3 1.5 1.4 0.9 5.0 1.3 1.4 2.4 1.6 6.8 1.6 1.6 1.6 2.2 7.0 4.2 1.4 2.2 1.2 8.9 1.2 1.2 1.2 1.2 4.8 4.8 Bad debt allowance 0.2 0.0 0.2 0.7 0.1 1.0 0.0 0.0 (0.0) (0.0) 0.0 (0.0) 0.0 0.0 0.0 0.0 (0.0) 0.1 (0.1) 0.0 (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 Stock-based compensation 41.4 20.2 17.4 14.6 12.0 64.3 15.4 18.9 16.3 13.0 63.7 27.4 34.0 20.8 14.3 96.4 17.0 21.7 21.0 20.0 79.7 18.1 23.0 22.8 22.8 86.8 100.6 O ther (35.7) (68.3) (5.1) (0.8) 1.5 (72.7) (1.7) (2.3) (13.3) (20.6) (37.9) (8.9) (0.6) (3.4) (8.6) (21.6) (10.7) (47.4) (16.5) 0.0 (74.6) 0.0 0.0 0.0 0.0 0.0 0.0 Change in operating assets and liabilities: 98.1 (8.4) 28.8 17.6 40.2 78.2 12.6 3.8 8.3 46.0 70.6 49.4 16.0 24.6 (25.0) 65.0 84.5 17.3 2.4 (6.5) 97.8 30.9 17.0 24.7 (37.6) 35.0 34.9 Accounts receivable (3.0) (0.7) (1.4) (4.9) (2.4) (9.4) 1.3 0.5 0.4 (9.4) (7.2) 7.4 (3.7) 1.5 (16.2) (11.0) 13.3 (4.2) 1.5 (15.2) (4.6) 14.2 (1.7) 2.2 (20.9) (6.1) (6.2) Inventory (1.8) (1.1) (0.5) 0.5 (1.1) (2.2) (0.3) 0.2 (1.2) (0.5) (2.0) (2.2) (0.3) (0.4) 0.5 (2.3) (0.7) (0.5) (1.0) 0.6 (1.6) (1.8) (1.8) (0.0) 0.9 (2.7) (2.6) Prepaid expenses (5.4) (4.7) (2.2) 3.7 (2.7) (6.0) (4.4) (3.2) 0.3 0.5 (6.8) (4.0) 1.3 3.3 (1.2) (0.7) (2.5) (2.4) 1.9 0.0 (3.0) 0.0 0.0 0.0 0.0 0.0 0.0 Other assets (7.4) (9.9) (0.3) (0.7) (9.7) (20.5) (1.6) (1.8) (0.1) 2.1 (1.4) (2.4) (1.2) (0.1) 4.8 1.1 (3.8) (0.7) 0.5 0.0 (4.0) 0.0 0.0 0.0 0.0 0.0 0.0 Accounts payable 9.4 2.9 2.0 3.5 (0.5) 7.8 0.8 5.3 (2.7) (1.3) 2.1 8.0 9.7 (3.0) (12.5) 2.2 14.8 (0.7) (7.0) 0.1 7.2 10.5 12.5 14.5 (25.6) 11.8 11.7 Accrued liabilities 17.5 (31.4) 18.7 0.1 33.9 21.3 (33.9) 21.3 (7.4) 32.0 12.0 (15.2) 30.9 (4.3) 23.6 35.0 (21.4) 26.5 (12.5) 4.0 (3.4) 4.0 4.0 4.0 4.0 16.0 16.0 Income taxes payable 66.6 29.3 5.7 9.2 15.2 59.4 42.7 (25.0) 10.8 15.8 44.3 48.1 (27.0) 20.2 (32.4) 8.8 75.3 (8.6) 11.2 0.0 77.9 0.0 0.0 0.0 0.0 0.0 0.0 Due to McDonald's Corp. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Deferred rent 19.6 5.1 6.3 5.4 6.9 23.8 5.9 5.9 7.1 6.8 25.7 6.8 5.8 6.8 7.6 27.0 6.8 6.7 8.0 4.0 25.5 4.0 4.0 4.0 4.0 16.0 16.0 Other long-term liabilities 2.6 2.3 0.4 0.9 0.5 4.1 2.1 0.6 1.0 0.1 3.9 2.8 0.6 0.6 0.9 4.8 2.8 1.2 (0.2) 0.0 3.8 0.0 0.0 0.0 0.0 0.0 0.0 Net cash provided by operating activities 411.1 29.4 141.5 123.1 126.0 420.0 125.3 142.5 121.0 140.1 528.8 179.8 180.7 189.3 132.3 682.1 242.7 158.3 187.5 190.0 778.6 236.7 241.1 250.2 189.2 917.2 1,054.8 Cash flows from investing activities: Purchases of leasehold improvements, PP&E, net (151.1) (41.9) (48.5) (47.2) (59.5) (197.0) (36.5) (43.6) (56.5) (63.3) (199.9) (47.2) (55.6) (57.6) (92.2) (252.6) (59.4) (55.0) (67.4) (72.2) (254.1) (59.9) (63.6) (64.9) (78.4) (266.8) (278.4) Purchases of AFS securities (183.3) (60.4) (50.5) (18.0) (84.6) (213.5) (54.6) (175.8) (63.5) (93.7) (387.6) (89.8) (101.5) (199.4) (130.4) (521.0) (139.1) (134.8) (159.9) - (433.8) - - - - - - Maturity of AFS securities 124.8 - - - 55.0 55.0 39.5 39.3 28.0 52.5 159.3 49.5 71.8 50.0 83.5 254.8 95.0 121.0 71.5 287.5 Franchise acquisitions (0.6) - - - - - - - - - - - - - - - - - - - - - - - - - - Net cash used in investing activities (210.2) (102.2) (99.0) (65.2) (89.1) (355.5) (51.6) (180.2) (92.1) (104.5) (428.3) (87.5) (85.4) (206.9) (139.1) (518.8) (103.5) (68.8) (155.9) (72.2) (400.4) (59.9) (63.6) (64.9) (78.4) (266.8) (278.4) Cash flows from financing activities: Acquisition of treasury stock (63.5) (27.0) (12.6) (43.0) (134.5) (217.1) (51.0) (30.1) (16.6) (41.2) (138.9) (12.7) (37.6) (13.1) (24.9) (88.3) (23.2) (93.1) (30.8) (50.0) (197.1) (40.0) (40.0) (40.0) (40.0) (160.0) (200.0) Proceeds from option exercises 0.6 0.1 0.1 0.1 0.2 0.5 0.1 0.1 0.0 0.0 0.3 (0.1) 0.0 (0.0) 0.0 (0.1) (0.1) (0.1) (0.1) - (0.2) - - - - - - Excess tax benefit on stock-based compensation 38.8 68.4 5.3 0.9 (1.4) 73.2 1.9 2.4 13.4 20.7 38.4 9.0 0.6 3.5 8.7 21.7 10.8 47.2 16.8 0.2 75.1 - - - - - - Net cash provided by (used in) financing activities (24.3) 41.4 (7.3) (42.0) (135.7) (143.5) (49.0) (27.6) (3.2) (20.6) (100.4) (3.8) (37.0) (9.7) (16.2) (66.7) (12.5) (45.9) (14.0) (49.8) (122.3) (40.0) (40.0) (40.0) (40.0) (160.0) (200.0) Effect of exchange rate changes on cash and equivalents (0.21) 0.39 (0.67) 0.46 0.20 0.38 (0.30) 0.03 0.70 0.1 0.54 (0.0) 0.16 (0.17) (0.2) (0.22) (3.21) 1.04 (0.99) (3.16) 0 0 Net increase (decrease) in cash and cash equivalents 176.4 (31.1) 34.6 16.4 (98.6) (78.7) 24.4 (65.3) 26.4 15.1 0.6 88.4 58.5 (27.4) (23.2) 96.3 123.5 44.7 16.5 68.0 252.7 136.7 137.5 145.3 70.8 490.4 576.4 Cash and cash equivalents at beginning of period 224.8 401.2 370.2 404.8 421.1 401.2 322.6 346.9 281.6 308.1 322.6 323.2 411.6 470.1 442.6 323.2 419.5 543.0 587.6 604.2 419.5 672.2 808.9 946.5 1,091.8 672.2 1,162.6 Cash and cash equivalents at end of period 401.2 370.2 404.8 421.1 322.6 322.6 346.9 281.6 308.1 323.2 323.2 411.6 470.1 442.6 419.5 419.5 543.0 587.6 604.2 672.2 672.2 808.9 946.5 1,091.8 1,162.6 1,162.6 1,739.0 CASH FLOW SUMMARY Operating Cash Flow 411.1 29.4 141.5 123.1 126.0 420.0 125.3 142.5 121.0 140.1 528.8 179.8 180.7 189.3 132.3 682.1 242.7 158.3 187.5 190.0 778.6 236.7 241.1 250.2 189.2 917.2 1,054.8 - Capex (151.1) (41.9) (48.5) (47.2) (59.5) (197.0) (36.5) (43.6) (56.5) (63.3) (199.9) (47.2) (55.6) (57.6) (92.2) (252.6) (59.4) (55.0) (67.4) (72.2) (254.1) (59.9) (63.6) (64.9) (78.4) (266.8) (278.4) = Free Cash Flow 259.9 (12.5) 93.0 75.9 66.5 222.9 88.8 98.9 64.4 76.8 328.9 132.5 125.0 131.8 40.1 429.5 183.4 103.3 120.1 117.8 524.5 176.7 177.5 185.3 110.8 650.4 776.4 Source: Source: Company Data, Morgan Stanley Research estimates 4
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COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL IBC % OF RATING CATEGORY Overweight/Buy 1210 36% 340 43% 28% Equal-weight/Hold 1445 43% 346 44% 24% Not-Rated/Hold 91 3% 9 1% 10% Underweight/Sell 651 19% 95 12% 15% TOTAL 3,397 790 Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Stock Price, Price Target and Rating History (See Rating Definitions) Important Disclosures for Morgan Stanley Smith Barney LLC Customers 6
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Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. INDUSTRY COVERAGE: Restaurants COMPANY (TICKER) RATING (AS OF) PRICE* (11/12/2015) John Glass BJ's Restaurants, Inc. (BJRI.O) E (09/16/2015) $43.62 Bloomin' Brands Inc (BLMN.O) E (11/05/2015) $16.53 Brinker International Inc. (EAT.N) E (06/26/2013) $44.81 Buffalo Wild Wings, Inc. (BWLD.O) E (08/12/2014) $153.00 Chipotle Mexican Grill, Inc. (CMG.N) O (09/30/2013) $614.68 Darden Restaurants Inc. (DRI.N) E (10/30/2014) $55.13 Dominos Pizza Inc. (DPZ.N) E (03/27/2008) $102.89 Dunkin Brands Group Inc (DNKN.O) E (09/06/2011) $41.26 El Pollo Loco Holdings (LOCO.O) E (12/03/2014) $11.52 Jack in the Box Inc. (JACK.O) E (09/02/2010) $73.26 McDonald's Corporation (MCD.N) E (10/06/2014) $112.11 Noodles & Co (NDLS.O) E (03/30/2014) $10.72 Panera Bread Company (PNRA.O) E (09/30/2013) $172.28 Red Robin Gourmet Burgers, Inc. (RRGB.O) E (01/09/2013) $68.31 Restaurant Brands International, Inc. (QSR.N) O (10/06/2014) $35.34 Shake Shack Inc (SHAK.N) U (07/07/2015) $42.47 Sonic Corp. (SONC.O) E (06/19/2013) $27.53 Starbucks Corp. (SBUX.O) O (03/07/2011) $61.07 Texas Roadhouse, Inc. (TXRH.O) U (11/05/2015) $34.13 The Cheesecake Factory, Inc. (CAKE.O) E (03/27/2008) $46.78 The Wendy's Company (WEN.O) E (01/08/2015) $9.63 Wingstop Inc (WING.O) O (07/07/2015) $21.41 Yum! Brands, Inc. (YUM.N) E (01/09/2014) $67.12 Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted. 2015 Morgan Stanley 8