there is no more downside - hedgeyedocs.hedgeye.com/he_mcd_jul2015.pdf · hedgeyedata source:...

HEDGEYE 1

BEST IDEA: LONG MCDONALD’S (MCD) July 8, 2015

HOWARD PENNEY SHAYNE LAIDLAW

THERE IS NO MORE DOWNSIDE

HEDGEYE 2

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 www.hedgeye.com

DISCLAIMER

HEDGEYE 3

PLEASE SUBMIT QUESTIONS TO

[email protected]

HEDGEYE 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 5

KEY POINTS

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!

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.

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.

2

3 LOWERING THE COST STRUCTURE

1 1

EXECUTIVE SUMMARY

HEDGEYE 7

• 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 1955.

• 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:


3. High Growth Markets:

— 10% of 2014 operating income

4. Foundational Markets:


• Strong legacy management team with an activist mindset

COMPANY OVERVIEW

Data Source: Company filings.

HEDGEYE 8

FINANCIAL SUMMARY

Data Source: Company filings, FactSet.

($ 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 $105,326

2011 2012 2013 2014 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%)

HEDGEYE 9

FY2014 RESTAURANTS FRANCHISE VERSUS COMPANY OWNED BY SEGMENT

29,556 Franchised Restaurants (81%)


Franchised Restaurants by Segment

6,734 Owned Restaurants (19%)

Owned Restaurants by Segment United States

Owned 4%

Europe Owned 6%

APMEAOwned 8%

Other Countries & Corporate Owned

1%

United States Franchise

35% Europe Franchise

16%

APMEA Franchise 21%

Other Countries & Corporate Franchise

9%

United States Owned

4% Europe Owned

6%

APMEA Owned 8%

Other Countries & Corporate Owned

1%

United States Franchise

35% Europe Franshise

16%

APMEA Franchise 21%

Other Countries & Corporate Franchise

9%

*Percentages in pie charts represent percentage of total system-wide restaurants.

HEDGEYE 10

FY2014 REVENUE / SOP BY SEGMENT

$27,441 million FY2014 Revenue

FY2014 Revenue by Segment FY2014 Segment Operating Profit


$7,949 million FY2014 SOP

U.S. 32%

Europe 40%

APMEA 23%

Other Countries & Corporate

5%

U.S. 44%

Europe 41%

APMEA 14%

Other Countries & Corporate

1%

RECENT PERFORMANCE

HEDGEYE 12

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%

Quick Service Relative Performance vs SPX1 Week 1 Month 3 Months 6 Months 1 Year

Source: FactSet >1 STDEV ABOVE MEAN <1 STDEV BELOW MEAN ©HEDGEYE RISK MANAGEMENT

MCD HAS BEEN UNDERPERFORMING

% Change in Consensus Estimates: Next Fiscal Year EPSQuick 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 13

PRICE PERFORMANCE 5 - Year 3 - Year

1 - Year 3 - Months

Data Source: FactSet. Comp set includes: YUM, SONC, QSR, WEN, JACK, DNKN, SBUX.

0

50

100

150

200

250

300

350

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 500

• MCD underperformed its peers by 56% during the period • MCD underperformed the S&P 500 by 28% during the period

0

50

100

150

200

07/06/12 07/06/13 07/06/14 07/06/15 (INDEX) MCD COMP SET (INDEX) MCD (INDEX) S&P 500


40

60

80

100

120

140

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


90

95

100

105

110

115

04/06/15 05/06/15 06/06/15 07/06/15

(INDEX) MCD COMP SET (INDEX) MCD (INDEX) S&P 500

• MCD underperformed its peers by 11% during the period • MCD matched the S&P 500 during the period

FINANCIAL OVERVIEW

HEDGEYE 15

$21.6 $22.8

$23.5 $22.7

$24.1

$27.0 $27.6 $28.1 $27.4

$25.0 $24.2

$0

$5

$10

$15

$20

$25

$30

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E

Billio

ns

HISTORICAL SALES PERFORMANCE

Data Source: FactSet, Consensus Metrix.

FY2006-FY2016E CAGR: 1.2%

5-yr CAGR: 4.6% 4-yr CAGR: -3.2%

HEDGEYE 16

SYSTEM WIDE SALES GROWTH

(5.0%)

(3.0%)

(1.0%)

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Sales Growth

Data Source: FactSet, Company Filings.

HEDGEYE 17

MONTHLY SSS BY REGION Global U.S.

Europe APMEA -10%

-5%

0%

5%

10%

15%

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

MCD Global SSS Two-Year Average -10%

-5%

0%

5%

10%

15%

20%

25%

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

MCD U.S. SSS Two-Year Average

-10%

-5%

0%

5%

10%

15%

20%

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

MCD Europe SSS Two-Year Average -15%

-10%

-5%

0%

5%

10%

15%

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

MCD APMEA SSS Two-Year Average

Data Source: Company Filings.

HEDGEYE 18

$5.90

$6.75

$7.49 $7.77

$8.58

$9.71 $9.85 $10.08

$9.44

$8.81 $9.18

$0

$2

$4

$6

$8

$10

$12


Billio

ns

HISTORICAL EBITDA PERFORMANCE


FY2006-FY2016E CAGR: 4.5%

HEDGEYE 19

OPERATING INCOME GROWTH

Data Source: FactSet, Company Filings.

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

21%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

EBIT Growth

HEDGEYE 20

CASH FLOW FREE CASH FLOW HAS BEEN STEADY

Data Source: FactSet.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Mar '15 LTM

Millio

ns

Net Operating Cash Flow Capital Expenditures Free Cash Flow Free Cash Flow Growth (%)

HEDGEYE 21

$2.83

$1.92

$3.76

$4.11

$4.58

$5.27 $5.36 $5.55

$4.82 $4.76

$5.18

$0

$1

$2

$3

$4

$5

$6


Billio

ns

HISTORICAL EPS PERFORMANCE

Data Source: Factset, Consensus Metrix.

FY2006-FY2016E CAGR: 6.2%

4-yr CAGR: -0.9%

HEDGEYE 22

$1.00

$1.50 $1.63

$2.05

$2.26

$2.53

$2.87

$3.12 $3.28

$3.47

$3.74

$0

$1

$1

$2

$2

$3

$3

$4

$4


Billio

ns

DIVIDEND PER SHARE


HEDGEYE 23

1,252 1,212

1,146 1,107 1,080

1,045 1,020 1,006 986 949

915

-6%

-5%

-4%

-3%

-2%

-1%

0%

0

200

400

600

800

1,000

1,200

1,400


Sh

are

s O

uts

tan

din

g i

n M

illio

ns

Diluted Shares Outstanding YoY Change

SHARES OUTSTANDING


HEDGEYE 24

RETURN ON INCREMENTAL INVESTED CAPITAL

Data Source: Company filings, Factset.

29.1%

5.2%

31.5% 32.9%

5.6%

0.4%

22.9%

30.7%

(12.1%)

10.0%

(3.4%)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Yo

Y P

rice

Ch

an

ge

%

RO

IIC

ROIIC % Price Change

THE COMPANY HAS TAKEN CRITICAL STEPS TO GROW ROIIC

MARGIN TRENDS

HEDGEYE 26

RESTAURANT LEVEL MARGINS

Data Source: Consensus Metrix.

17.7%

20.0%

17.6%

19.1%

16.2%

18.7%

16.1% 15.7%

14.3%

15.7%

14.7%

16.3%

0%

5%

10%

15%

20%

25%

$0

$200

$400

$600

$800

$1,000

$1,200

Q1 '11A

Q2 '11A

Q3 '11A

Q4 '11A

Q1 '12A

Q2 '12A

Q3 '12A

Q4 '12A

Q1 '13A

Q2 '13A

Q3 '13A

Q4 '13A

Q1 '14A

Q2 '14A

Q3 '14A

Q4 '14A

Q1 '15A

Q2 '15E

Q3 '15E

Q4 '15E

Q1 '16E

Q2 '16E

Q3 '16E

Q4 '16E

% M

arg

in

Re

sta

ura

nt

Le

ve

l P

rofi

t

Restaurant Level Profit Restaurant Level Margins (% of Company Revenue)

― Restaurant level margins are leveling off and will begin to increase in 3Q15

― 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

HEDGEYE 27

9.2%

8.1%

9.1% 8.7%

9.0%

7.6%

9.3%

8.2%

9.8%

8.9%

9.8%

8.9%

0%

2%

4%

6%

8%

10%

12%

$480

$500

$520

$540

$560

$580

$600

$620

$640

$660

$680

G&

A M

arg

in

G&

A in

millio

ns

G&A G&A Margin

G&A AS A % OF SALES


― 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

HEDGEYE 28

29.9%

33.4%

30.0%

32.0%

29.5%

33.0%

28.9% 29.7%

26.5%

30.8% 29.2%

33.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Op

era

tin

g M

arg

in

EB

IT

EBIT Operating Margin

OPERATING MARGIN (EBIT)

― Operating Margins should see an acceleration as they franchise more stores, making for more profitable and predictable royalty income


MACRO ENVIRONMENT

HEDGEYE 30

UNIVERSITY OF MICHIGAN CONSUMER CONFIDENCE

Data Source: University of Michigan, FactSet. Updated on 7/1/2015.

0

20

40

60

80

100

120

U Mich Consumer Index 3 Month Moving Average 6 Month Moving Average

Source: University of Michigan, FactSet ©HEDGEYE RISK MANAGEMENT

HEDGEYE 31

U.S. PERSONAL INCOME YOY SA

Data Source: Bureau of Economic Analysis, FactSet. Updated on 7/1/2015.

-5

-3

-1

1

3

5

7

9

11

7/3

1/19

95

11

/30

/19

95

3

/29

/19

96

7

/31/

199

6

11/2

9/1

99

6

3/3

1/19

97

7

/31/

199

7

11/2

8/1

99

7

3/3

1/19

98

7

/31/

199

8

11/3

0/1

99

8

3/3

1/19

99

7

/30

/19

99

11

/30

/19

99

3

/31/

20

00

7

/31/

20

00

11

/30

/20

00

3

/30

/20

01

7/3

1/2

00

1 11

/30

/20

01

3/2

9/2

00

2

7/3

1/2

00

2

11/2

9/2

00

2

3/3

1/2

00

3

7/3

1/2

00

3

11/2

8/2

00

3

3/3

1/2

00

4

7/3

0/2

00

4

11/3

0/2

00

4

3/3

1/2

00

5

7/2

9/2

00

5

11/3

0/2

00

5

3/3

1/2

00

6

7/3

1/2

00

6

11/3

0/2

00

6

3/3

0/2

00

7

7/3

1/2

00

7

11/3

0/2

00

7

3/3

1/2

00

8

7/3

1/2

00

8

11/2

8/2

00

8

3/3

1/2

00

9

7/3

1/2

00

9

11/3

0/2

00

9

3/3

1/2

010

7

/30

/20

10

11/3

0/2

010

3

/31/

20

11

7/2

9/2

011

11

/30

/20

11

3/3

0/2

012

7

/31/

20

12

11/3

0/2

012

3

/29

/20

13

7/3

1/2

013

11

/29

/20

13

3/3

1/2

014

7

/31/

20

14

11/2

8/2

014

3

/31/

20

15

US Personal Income 3 Month Moving Average 6 Month Moving Average

Source: Bureau of Economic Analysis, FactSet ©HEDGEYE RISK MANAGEMENT

HEDGEYE 32

NATIONAL DAILY AVG. GASOLINE PRICE

Data Source: U.S. Department of Energy, FactSet, updated on 7/1/15.

$2.00

$2.20

$2.40

$2.60

$2.80

$3.00

$3.20

$3.40

$3.60

$3.80

Gasoline Prices 3 Month Moving Average 6 Month Moving Average Source: U.S. Department of Energy ©HEDGEYE RISK MANAGEMENT

HEDGEYE 33

EMPLOYMENT GROWTH BY AGE

Data Source: Bureau of Labor Statistics, Hedgeye.

20-24 YOA 25-34 YOA 35-44 YOA 45-54 YOA 55-64 YOAMay-15 0.75% 3.42% 0.77% 0.27% 2.61%Apr-15 -0.22% 3.17% 0.51% 0.36% 3.52%Mar-15 -0.84% 2.64% 0.46% 0.50% 2.63%Feb-15 2.91% 2.59% 0.22% 1.33% 1.96%Jan-15 1.68% 2.57% 0.34% 1.04% 3.38%Dec-14 -0.46% 2.48% 0.82% 0.71% 3.59%Nov-14 1.60% 2.63% 1.06% 0.26% 3.78%Oct-14 3.28% 3.25% 1.38% 0.98% 3.54%Sep-14 0.91% 2.46% 0.88% 0.29% 3.59%Aug-14 2.21% 2.57% 0.55% 0.64% 2.61%Jul-14 2.38% 2.19% 0.38% 0.23% 2.74%

Jun-14 2.15% 2.34% 1.19% 0.15% 2.74%May-14 3.95% 1.37% 0.47% -0.11% 2.72%Apr-14 2.37% 1.84% 0.89% -0.09% 1.98%Mar-14 4.12% 2.25% 1.13% -0.12% 1.43%Feb-14 1.31% 2.50% 1.66% -1.14% 1.74%Jan-14 2.32% 2.22% 1.94% -0.58% 0.89%Dec-13 2.82% 1.50% 0.74% -0.88% 0.52%Nov-13 1.17% 1.50% 0.56% -0.55% 1.15%Oct-13 0.92% 0.78% -0.47% -1.75% 0.95%Sep-13 1.50% 1.62% 0.35% -1.28% 1.72%Aug-13 3.25% 1.80% 0.64% -1.18% 2.57%Jul-13 2.00% 2.00% 0.67% -0.94% 3.48%

Jun-13 1.84% 1.80% 0.30% -0.87% 2.10%May-13 -0.19% 2.06% 0.59% -1.22% 2.76%

Employment Growth by Age Bucket

INDUSTRY OVERVIEW

HEDGEYE 35

HOW DOES MCD STACK UP


HEDGEYE 36

COMPETITION SSS OVERVIEW MCD HAS GIVEN UP SHARE, AND IT IS ABOUT TO TAKE IT BACK


-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E

MCD USA SSS JIB System-Wide SSS WEN System-Wide SSS SONC System-Wide SSS

CONSENSUS METRIX ESTIMATES

MCD SENTIMENT

HEDGEYE 38

SHORT INTEREST LOW ON AN ABSOLUTE BASIS BUT PESSIMISM IS GROWING

Data Source: FactSet. Updated on 7/1/2015.

HEDGEYE 39

ANALYST RATINGS ONLY 29% RATE IT AS A BUY


HEDGEYE 40

EARNINGS REVISIONS EPS ESTIMATES HAVE BOTTOMED


HEDGEYE 41

EV / NTM EBITDA

Data Source: FactSet, Hedgeye.

McDonald’s

8x

9x

10x

11x

12x

13x

7/02/15 1/08/15 7/17/14 1/23/14 8/01/13 2/07/13 8/16/12 2/23/12 9/01/11 3/10/11 9/16/10

+1 STD -1 STD Average EV/EBITDA EV/EBITDA

Sandwich Category Competitors (QSR, JACK, MCD, PLKI, SONC, WEN, YUM)

6x

8x

10x

12x

14x

16x

7/02/15 1/08/15 7/17/14 1/23/14 8/01/13 2/07/13 8/16/12 2/23/12 9/01/11 3/10/11

+1 STD -1 STD Average EV/EBITDA EV/EBITDA

ORIGINAL SHORT THESIS

HEDGEYE 43

• 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

ORIGINAL SHORT CALL ON 3/14/13 MCD FLYING TOO CLOSE TO THE SUN

HEDGEYE 44

BETTER TO BE OUT OF IT THAN IN IT SINCE THEN

PERFORMANCE SINCE 3/14/13


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

162.81

97.14

131.98

80

90

100

110

120

130

140

150

160

170

(INDEX) MCD Comp Set (INDEX) MCD (INDEX) S&P 500

HEDGEYE 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

1

2

3

4

5

LEADERSHIP

HEDGEYE 47

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 1996. 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.

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.

STRONG MANAGEMENT TEAM TALENTED EXECUTIVES LEADING THE COMPANY IN THE RIGHT DIRECTION

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.

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 48

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 2012. 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.

REGIONAL EXECUTIVES TALENTED EXECUTIVES LEADING THE COMPANY IN THE RIGHT DIRECTION

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.


MCD BY BUSINESS SEGMENT

HEDGEYE 50

UNITED STATES

Overview Same-Restaurant Sales Growth

Improvements Being Made

Company Commentary

Data Source: Company Filings, Consensus Metrix.

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15E

3Q

15E

4Q

15E

1Q16

E

United States SRS Two-Year Avg.

HEDGEYE Data: CF, CM

• 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

• 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.

• 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

12%

14%

16%

18%

20%

22%

-250

-200

-150

-100

-50

0

50

100

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15E

3Q

15E

4Q

15E

1Q16

E

YoY BPS Chg. U.S. Restaurant Level Margin Avg. LTM

Data: CF, CM HEDGEYE

Restaurant Level Margin

HEDGEYE 51

-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15E

3Q

15E

4Q

15E

1Q16

E

Europe SRS Two-Year Avg.


EUROPE



Company Commentary

• 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

• 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


16%

17%

18%

19%

20%

21%

22%

-200

-150

-100

-50

0

50

100

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15E

3Q

15E

4Q

15E

1Q16

E

YoY BPS Chg. Europe Restaurant Level Margin Avg. LTM


• 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


HEDGEYE 52

APMEA




• 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

• 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

-12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8%

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15E

3Q

15E

4Q

15E

1Q16

E

APMEA SRS Two-Year Avg.


Management Commentary

6%

8%

10%

12%

14%

16%

18%

20%

-800

-600

-400

-200

0

200

400

600

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15E

3Q

15E

4Q

15E

1Q16

E

YoY BPS Chg. APMEA Restaurant Level Margin Avg. LTM


• 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


HEDGEYE 53

THE NEW SEGMENT STRUCTURE STARTED JULY 1, 2015

U.S. International Lead Markets

High Growth Markets

Foundational Markets

• 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

• Company’s largest segment, accounting for more than 40% of the company’s 2014 operating income

• 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.

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

HEDGEYE 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 56

HITTING ROCK BOTTOM 6/15 MCD WAS ON NATIONAL TV SUPPORTING THE VALUE MESSAGE ― FIRST SIGN OF FRANCHISEE UNITY

-5%

0%

5%

10%

15%

20%

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

MCD U.S. SSS Two-Year Average

2003, the Dollar Menu

was introduced

2H 2012, took the small fries off the Dollar Menu

2013, took the McDouble off

the Dollar Menu

2015, stopped nationally

advertising the value message

Data Source: Company Filings, Hedgeye Research.

HEDGEYE 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 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”


HEDGEYE 59

RETURNING TO CORE VALUES

QUALITY

SERVICE

CLEANLINESS

VALUE

HEDGEYE 60

TACTICALLY, HOW DO THEY RETURN TO GROWTH?

• 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

• Transformation of the customer service experience • Modernizing the interaction between MCD and the customer to create a memorable experience

• Refranchise and close stores • Eliminate underperforming stores to cut costs and improve profitability, leading to improved industry metrics

• 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

• 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

1

2

3

4

5

HEDGEYE 61










1

2

3

4

5

HEDGEYE 62

FOCUS ON THE FOOD IF THE FOOD ISN’T GOOD, ALL THE OTHER WORK WILL BE FOR NOTHING

Improve Current Products Create New Products

“Create Your Taste” Bring Back the Value Support for LTO’s & Promotions

Menu Simplification • 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

• 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

• 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 bourbon-

flavored sauce ― Simmental beef and Wilde Küche in Europe

• 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

• 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

Data Source: Company filings, Hedgeye Research.

HEDGEYE 63

SHRINK THE MENU STRONG CORRELATION SEEN BETWEEN INCREASING MENU SIZE AND DECREASING COMPS

93

102

107 106 108

-4%

-2%

0%

2%

4%

6%

85

90

95

100

105

110

2010 2011 2012 2013 2014

SS

S %

Me

nu

Ite

ms

McDonald's

Menu U.S. SSS

60 59

78 70 73

-6%

-4%

-2%

0%

2%

4%

0 10 20 30 40 50 60 70 80 90

2010 2011 2012 2013 2014

SS

S %

Me

nu

Ite

ms

Burger King

Menu U.S. & Canada SSS

72

64 63

68

65

-6%

-4%

-2%

0%

2%

4%

58 60 62 64 66 68 70 72 74

2010 2011 2012 2013 2014

SS

S %

Me

nu

Ite

ms

Jack In The Box

Menu SSS

55

47 41 42

49

-2%

0%

2%

4%

0

10

20

30

40

50

60

2010 2011 2012 2013 2014

SS

S %

Me

nu

Ite

ms

Wendy's

Menu SSS

194 210 212

263 233

0%

1%

2%

3%

4%

5%

6%

0

50

100

150

200

250

300

2010 2011 2012 2013 2014

SS

S %

Me

nu

Ite

ms

Dunkin' Donuts

Menu SSS

Data Source: Restaurant Research.

84 80 87 92

127

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

0

20

40

60

80

100

120

140

2010 2011 2012 2013 2014

SS

S %

Me

nu

Ite

ms

Sonic

Menu SSS

HEDGEYE 64

NEW PRODUCTS AND LTO’S CREATING EXCITEMENT AROUND THESE ITEMS IS CRUCIAL, MORE ISN’T ALWAYS BETTER

7 9 9

23

8

-4%

-2%

0%

2%

4%

6%

0

5

10

15

20

25

2010 2011 2012 2013 2014

SS

S %

Ne

w P

rod

uct

s &

LT

O's

McDonald's

New Products and LTO's U.S. SSS

6

13

17

23

13

-6%

-4%

-2%

0%

2%

4%

0

5

10

15

20

25

2010 2011 2012 2013 2014

SS

S %

Ne

w P

rod

uct

s &

LT

O's

Burger King

New Products and LTO's

14

8

13

28

14

-6%

-4%

-2%

0%

2%

4%

0

5

10

15

20

25

30

2010 2011 2012 2013 2014

SS

S %

Ne

w P

rod

uct

s &

LT

O's

Jack In The Box

New Products and LTO's SSS

9

12

9 10 10

-1%

0%

1%

2%

3%

0

2

4

6

8

10

12

14

2010 2011 2012 2013 2014

SS

S %

Ne

w P

rod

uct

s &

LT

O's

Wendy's


22 20 24 24

41

0%

1%

2%

3%

4%

5%

6%

0 5

10 15 20 25 30 35 40 45

2010 2011 2012 2013 2014

SS

S %

Ne

w P

rod

uct

s &

LT

O's

Dunkin' Donuts



11

16 20

26 28

-10% -8% -6% -4% -2% 0% 2% 4% 6%

0

5

10

15

20

25

30

2010 2011 2012 2013 2014

SS

S %

Ne

w P

rod

uct

s &

LT

O's

Sonic


HEDGEYE 65

BRING BACK THE VALUE MCD HAS GOTTEN AWAY FROM PROVIDING VALUE

$5.75 $5.75 $5.85

$6.00

$6.20

-4%

-2%

0%

2%

4%

6%

$5.5 $5.6 $5.7 $5.8 $5.9 $6.0 $6.1 $6.2 $6.3

2010 2011 2012 2013 2014

SS

S %

Avg

. Ch

eck

McDonald's

Avg. Check U.S. SSS

$5.75 $5.75 $5.80

$6.15

$6.30

-6%

-4%

-2%

0%

2%

4%

$5.4

$5.6

$5.8

$6.0

$6.2

$6.4

2010 2011 2012 2013 2014

SS

S %

Avg

. Ch

eck

Burger King

Avg. Check U.S. & Canada SSS

$6.15 $6.25

$6.39 $6.48

$6.83

-6%

-4%

-2%

0%

2%

4%

$5.8

$6.0

$6.2

$6.4

$6.6

$6.8

$7.0

2010 2011 2012 2013 2014

SS

S %

Avg

. Ch

eck

Jack in the Box

Avg. Check SSS

$6.15

$6.40 $6.50

$6.65

$6.85

-2%

0%

2%

4%

$5.8

$6.0

$6.2

$6.4

$6.6

$6.8

$7.0

2010 2011 2012 2013 2014

SS

S %

Avg

. Ch

eck

Wendy's

Avg. Check SSS

$4.30

$4.50 $4.50 $4.60

$4.75

0%

2%

4%

6%

$4.0 $4.1 $4.2 $4.3 $4.4 $4.5 $4.6 $4.7 $4.8

2010 2011 2012 2013 2014

SS

S %

Avg

. Ch

eck

Dunkin' Donuts

Avg. Check SSS


$5.00 $5.00 $5.69 $5.93 $6.05

-10% -8% -6% -4% -2% 0% 2% 4% 6%

$0

$1

$2

$3

$4

$5

$6

$7

2010 2011 2012 2013 2014

SS

S %

Avg

. Ch

eck

Sonic

Avg. Check SSS

HEDGEYE 66

TRANSFORMING THE CUSTOMER EXPERIENCE

COULD YOU IMAGINE THIS SERVICE IN THE STATES?

Data Source: Photographer Steve Lunum / McDonald’s Corp. via Bloomberg. Photo taken at MCD restaurant in Martin Place in downtown Sydney.

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: https://buildyourburger.mcdonalds.com.au/, I would argue it is much easier than ordering in person

https://buildyourburger.mcdonalds.com.au/�

HEDGEYE 67

SHORTER DRIVE-THRU MENU INCREASES SPEED AND CONVENIENCE

• Eliminated 16 EVM • 1/4lb and McWrap options • And better organized

• 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


HEDGEYE 68










1

2

3

4

5

HEDGEYE 69

IMPROVE THE CUSTOMERS INTERACTION WITH THE BRAND

MODERNIZING THE INTERACTION WITH THE BRAND IS THE KEY TO STAYING RELEVANT

Restaurant Modernization Self-Order Kiosks

Delivery Expansion Raising the Minimum Wage

Mobile App / Web • 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% drive-thru)

• 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

• 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

• 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

• Happier employees = a better experience for customers

• MCD to raise minimum wage at company owned stores, still unclear how many franchisees will follow suit

• 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


HEDGEYE 70

IMPROVEMENTS TO THE PROCESS SIDE BY SIDE DRIVE-THRU’S AND DELIVERY

(Netherlands) (United States)

(Delivery in Japan) Data Source: Hedgeye Research.

HEDGEYE 71










1

2

3

4

5

HEDGEYE 72

CLOSE STORES AND REFRANCHISE

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

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


HEDGEYE 73










1

2

3

4

5

HEDGEYE 74

MANAGING COMPLEXITY MAKING MCD AN EFFICIENT / ENJOYABLE PLACE TO WORK

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%

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

Data Source: Company filings, American Customer Satisfaction Index, Hedgeye Research.

HEDGEYE 75










1

2

3

4

5

HEDGEYE 76

COST REDUCTIONS / FINANCIAL ENGINEERING

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

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 2017. 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

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

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

Data Source: FactSet, Company Filings, Hedgeye Research.

HEDGEYE 77

SBUX CAPEX REDUCTION LEADS TO EBITDA GROWTH

EBITDA / CAPEX Relationship Quarterly ROIIC & Price Return

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

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

ROIIC Quarterly Price Return

-20%

-10%

0%

10%

20%

30%

40%

50%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15E

FY

16E

FY

17E

CAPEX EBITDA YoY Growth


HEDGEYE 78

-15%

-10%

-5%

0%

5%

10%

15%

20%

$0

$250

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

$2,250

$2,500

$2,750

$3,000

$3,250

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

CAPEX Actuals CAPEX Hedgeye Estimates

CAPEX Street Estimates EBITDA YoY Change Actuals

EBITDA Street Estimates EBITDA Hedgeye Estimates

MCD CAPEX REDUCTION LEADS TO EBITDA GROWTH

EBITDA / CAPEX Relationship Quarterly ROIIC & Price Return

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-100%

-50%

0%

50%

100%

150%

200%

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

ROIIC Quarterly Price Return

*CAPEX is calculated on an LTM basis for each quarter end


WE ARE STILL SEEING PLENTY OF COMPETITION

HEDGEYE 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 81

MCD HAS GIVEN UP SHARE AND THEY ARE ABOUT TO TAKE IT BACK

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E

MCD USA SSS JIB System-Wide SSS WEN System-Wide SSS SONC System-Wide SSS

CONSENSUS METRIX ESTIMATES


BULLISH CALL ON MCD = BEARISH ON COMPETITION

HEDGEYE 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

1

2

3

4

HEDGEYE 84

SONC: SUMMARY OVERVIEW

Sonic Corp. 27.79$ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION

(FY ends Dec.) NTM 2015E 2016E 2017E (Consensus in mm) NTM FY2015E FY2016E Stock Price 27.79$ Hedgeye EPS $1.24 $1.09 $1.23 $1.36 Sales $630.68 $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 $174.73 $163.9 $176.7 + Net Debt 433.5$ % 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 174.7$ 1) Strong super regional brand 1) Increased competition/Negative traffic in 2016 NTM EV/EBITDA 10.8x2) Good business model 2) SSS and margins have peaked NTM EPS 1.24$ 3) 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%

*Consensus EBITDA MarginSource: Factset, Company Filings

©HEDGEYE RISK MANAGEMENT

Data Source: FactSet, Hedgeye Research.

HEDGEYE 85

SONC: VALUATION

MORE DOWNSIDE AS THE MULTIPLE CONTRACTS

NTM EV/EBITDA Multiple9.7x 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%

EB

ITD

A

Data Source: Hedgeye Research.

HEDGEYE 86

SONC: SAME-STORE SALES

SSS HAVE PEAKED

-2%

0%

2%

4%

6%

8%

10%

12%

14%

System-Wide SSS 2Y Average

Data: CF, Consensus Estimates HEDGEYE

Consensus Estimates Hedgeye Estimates

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

System-Wide SSS 2Y Average

Data: CF, Consensus Estimates HEDGEYE

Data Source: Consensus Metrix, Hedgeye Research.

HEDGEYE 87

SONC: WHAT ARE THE STREET’S THOUGHTS

SONC HAS HAD A GREAT RUN Sell-Side Sentiment Short Interest


HEDGEYE 88

JACK: SUMMARY OVERVIEW

Jack in the Box Inc. 87.47$ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION

(FY ends Dec.) NTM 2015E 2016E 2017E (Consensus in mm) NTM FY2015E FY2016E Stock Price 87.47$ Hedgeye EPS $3.37 $2.99 $3.38 $3.75 Sales $1,620.85 $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 $315.24 $291.3 $322.6 + Net Debt 593.5$ % 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 -$


INVESTMENT POSITIVES INVESTMENT NEGATIVES NTM EBITDA 315.2$ 1) Strong operating model 1) Increased competition NTM EV/EBITDA 12.3x2) Potential for the spin off of Qdoba 2) SSS in FY2Q15 was the peak for this cycle NTM EPS 3.37$ 3) Strong Management 3) Little room for further margin improvement NTM P/E 25.9x 4) Valuation is extended & low short interest





HEDGEYE 89

JACK: VALUATION


$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%

EB

ITD

A


HEDGEYE 90

JACK: SAME-STORE SALES

JACK IN THE BOX SSS, EXCLUDES QDOBA

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15E

4Q

15E

1Q16

E

2Q

16E

JIB System SSS Two-Year Avg.

Data: CF, CM Estimates HEDGEYE


-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15E

4Q

15E

1Q16

E

2Q

16E

JIB System SSS Two-Year Avg.



HEDGEYE 91

JACK: WHAT ARE THE STREET’S THOUGHTS

OVERVIEW Sell-Side Sentiment Short Interest


HEDGEYE 92

WEN: SUMMARY OVERVIEW

Wendy's Company 10.79$ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION

(FY ends Dec.) NTM 2015E 2016E 2017E (Consensus in mm) NTM FY2015E FY2016E Stock Price 10.79$ Hedgeye EPS $0.33 $0.32 $0.35 $0.39 Sales $1,489.07 $1,785.1 $1,208.8 Shares Outstanding 363.5% Chg YoY -4.4% 10.0% 11.0% % Chg YoY -13.4% -32.3% Market Cap 3,921.7$ Consensus $0.33 $0.32 $0.35 $0.41 EBITDA $385.46 $391.7 $379.5 + Net Debt 1,168.1$ % 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 -$


INVESTMENT POSITIVES INVESTMENT NEGATIVES NTM EBITDA 385.5$ 1) The "NEW" Asset light business model 1) Increased competition NTM EV/EBITDA 13.2x2) Strong management 2) The financial engineering story has played out NTM EPS 0.33$ 3) Great Brand 3) Slowing same-store sales NTM P/E 32.4x3) Bearish Bias 4) Valuation





HEDGEYE 93

WEN: VALUATION


$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%

EB

ITD

A


HEDGEYE 94

WEN: SAME-STORE SALES

SSS WILL TREND DOWN AS MCD EXECUTES TURNAROUND

-1%

0%

1%

2%

3%

4%

5%

System-Wide SSS Two-Year Avg.



-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

System-Wide SSS Two-Year Avg.



HEDGEYE 95

WEN: WHAT ARE THE STREET’S THOUGHTS

Sell-Side Sentiment Short Interest


COMMODITIES

HEDGEYE 97

USDA BEEF WHOLESALE VALUE

BEEF PRICES ON THE RISE, BEGINNING TO TAPER OFF

Data Source: USDA.

340

350

360

370

380

390

400

410

Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15

Ce

nts

pe

r p

ou

nd

Beef Wholesale Value

HEDGEYE 98

CHICKEN AND EGGS

BUREAU OF LABOR STATISTICS RETAIL PRICES

Data Source: BLS.

$1.40

$1.50

$1.60

$1.70

$1.80

$1.90

$2.00

$2.10

$2.20

$2.30

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)

HEDGEYE 99

CME CORN

STEADY, OFF 52-WEEK HIGHS

Data Source: Mercaris.

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

6/1/2014 7/1/2014 8/1/2014 9/1/2014 10/1/2014 11/1/2014 12/1/2014 1/1/2015 2/1/2015 3/1/2015 4/1/2015 5/1/2015 6/1/2015

$/b

ush

el

CME Corn

HEDGEYE 100

WHEAT

WHEAT PRICES TRENDING DOWN

Data Source: USDA.

$3

$4

$5

$6

$7

$8

$9 Ju

n-1

4

Jul-

14

Au

g-1

4

Se

p-1

4

Oct

-14

No

v-14

De

c-14

Jan

-15

Fe

b-1

5

Ma

r-15

Ap

r-15

Ma

y-15

$/b

ush

el

No. 1 hard red winter (ordinary protein), Kansas City, MO No. 2 soft red winter, Chicago, IL No. 1 soft white, Portland, OR

VALUATION

HEDGEYE 102

PUBLIC TRADING COMPS


Valuation Metrics Operating Metrics

Equity Entreprise EV/ NTM EV/ LTM LTM Rest. LTM SSS % Stores

Company Name Price Value Value EBIT EBITDA Sales Level Margin System-wide Franchised

McDonald's $95.65 $91,681 $104,339 13.38x 12.03x $26,700 15.4% (1.7%) 81.4%

YUM! Brands $90.67 $39,206 $41,879 20.75x 13.06x $13,177 14.5% 0.5% 77.1%

Sonic $27.95 $1,452 $1,885 18.71x 10.95x $595 15.7% 7.5% 88.8%

Restaurant Brands Intl $39.14 $7,918 $21,359 33.76x 10.87x $27,441 8.9% 3.9% 99.7%

Wendy's $10.63 $3,864 $5,029 21.04x 15.57x $2,004 16.3% 2.3% 85.5%

Jack in the Box $87.89 $3,287 $3,879 21.46x 12.65x $1,520 19.3% 7.0% 75.0%

Dunkin' Brands Group $55.56 $5,345 $7,412 23.33x 17.31x $763 14.0% 2.2% 100.0%

Popeyes Louisiana Kitchen $59.59 $1,382 $1,445 21.90x 14.82x $245 19.1% 6.9% 97.3%

Mean 21.79x 13.41x 15.4% 3.6% 88.1%

Median 21.25x 12.85x 15.5% 3.1% 87.1%

HEDGEYE 103

VALUATION

Data Source: Hedgeye Research, FactSet.

McDonald's Corporation 97.29$ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION

(FY ends Dec.) NTM 2015E 2016E 2017E (Consensus in mm) NTM FY2015E FY2016E Stock Price 97.29$ Hedgeye EPS $4.96 $4.72 $5.25 $5.83 Sales $27,441.3 $25,022.3 $24,289.7 Shares Outstanding 958.5% Chg YoY -4.8% 11.3% 11.0% % Chg YoY -8.8% -2.9% Market Cap 93,253.9$ Consensus $4.96 $4.72 $5.20 $5.72 EBITDA $8,932.51 $8,727.7 $9,141.8 + Net Debt 12,657.0$ % Chg YoY -4.8% 10.2% 9.9% % Chg YoY -8.7% 4.7% + Preferred Equity -$ Variance % 0.0% 1.0% 1.9% EBITDA Margin* 32.6% 34.9% 37.6% + Minority Interest -$


INVESTMENT POSITIVES INVESTMENT NEGATIVES NTM EBITDA 8,932.5$ 1) New CEO; New Energy 1) Its early stages of the turnaround NTM EV/EBITDA 11.9x2) Alligning the cost structure 2) Declining same-store sales NTM EPS 4.96$ 3) Financial engeering 3) 2015 is a transition year NTM P/E 19.6x4) Valuation 4) Is the McDonald's brand dead?




HEDGEYE 104

VALUATION



$8,584 $94.26 $96.05 $97.84 $99.63 $101.43 $103.22 $105.01 $106.80 $108.59 $110.38 $112.17 $113.96$8,670 $95.34 $97.14 $98.95 $100.76 $102.57 $104.38 $106.19 $108.00 $109.81 $111.62 $113.43 $115.23$8,757 $96.42 $98.25 $100.08 $101.90 $103.73 $105.56 $107.38 $109.21 $111.04 $112.86 $114.69 $116.52$8,844 $97.52 $99.36 $101.21 $103.05 $104.90 $106.74 $108.59 $110.43 $112.28 $114.13 $115.97 $117.82$8,933 $98.62 $100.49 $102.35 $104.22 $106.08 $107.94 $109.81 $111.67 $113.54 $115.40 $117.26 $119.13$9,022 $99.74 $101.63 $103.51 $105.39 $107.27 $109.16 $111.04 $112.92 $114.80 $116.69 $118.57 $120.45$9,112 $100.87 $102.77 $104.67 $106.58 $108.48 $110.38 $112.28 $114.18 $116.08 $117.98 $119.89 $121.79$9,203 $102.01 $103.93 $105.85 $107.77 $109.69 $111.61 $113.53 $115.46 $117.38 $119.30 $121.22 $123.14$9,295 $103.17 $105.10 $107.04 $108.98 $110.92 $112.86 $114.80 $116.74 $118.68 $120.62 $122.56 $124.50

BEAR BASE BULL

-3% 11% 28%

EB

ITD

A

HEDGEYE 105

Food & Labor Inflation

WHAT WE THINK ABOUT THE POTENTIAL RISKS

THE CONCERNS ARE SMALL, BUT WORTH NOTING

• Market share is being lost to up and coming quick service opponents

• Marketing strategies and increased managerial focus will contribute to renewed market power

Competition

• The movement toward a healthier diet and higher quality food may steer the consumer away

• MCD is moving with this trend by committing to healthier ingredients

Consumer Preference

• Increased pressure on policy makers to increase minimum wage, with emphasis on fast food workers

• Commodity prices may continue to rise, but not materially in near future

• Major suppliers in the Asian region have been unreliable, causing regional traffic hits

• MCD has shifted sourcing in Asia to regain customer trust and confidence

Supply Issues

• Economic instability in countries like Ukraine and Russia pose a threat to MCD’s European business

• However, these regions represent a small percentage of the company’s sales

Country Risk

HEDGEYE 106

SUMMARY OF OUR THOUGHTS

• The Bottom is in

• New CEO; New Energy

• Significant changes to the organizational structure

• Bringing value back ― franchisees aligned

• Shrinking the menu

• Cutting G&A (more to come)

• Closing stores

1 • Refranchising stores

• Cutting capital spending

• Strong balance sheet & cash flow

• Less commodity inflation in the near-term

• Street is bearish

• Consensus is that MCD is a dead brand

2

3

4

5

6

7

9

8

10

11

12

13

HEDGEYE 107

FOR MORE INFORMATION CONTACT:

[email protected] 203.562.6500

there is no more downside - hedgeyedocs.hedgeye.com/he_mcd_jul2015.pdf · hedgeyedata source:...

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