restaurants: looking for 1q strength to continue, but

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May 6, 2021

Restaurants: Looking for 1Q Strength to Continue,But Keeping a Close Eye on CostsOur view: With the majority of our restaurants coverage having reported, we take a step back andreview 1Q results thus far, while also highlighting key themes we will be watching ahead. Among thesethemes are a continued strong domestic demand backdrop and potential for rising cost pressures, mostnotably labor costs. However, we still expect continued earnings recovery/strength in the 2Q, absentany new pandemic-related setbacks. Given current valuation levels, we are also slightly repositioningour preference list of Outperform names, with CMG our preferred earnings recovery/company-ownedname (as well as our overall top pick), and MCD now our favorite among the more heavily-franchisednames.

Expecting 1Q domestic top line momentum to continue into 2Q, though overall int'l recovery will takelonger: An overall solid 1Q earnings season for restaurants, driven by strong domestic sales, offset tosome extent by mixed—but improving—international trends. We expect domestic top line strength toextend into the 2Q, driven by a healthy consumer, elevated off-premise consumption (aided by digitalgrowth) and pent-up demand for on-premise occasions. And while we do expect stimulus tailwindsto fade—if they haven't already—one potential benefit may ultimately be increased labor supply asstimulus impact moderates.

Cost inflation concerns remain top of mind, but we see large brands well-positioned near-term: Weare also keeping a close eye on the cost side of the P&L, in particular on labor costs, which did notappear to materially impact 1Q results. And while labor market tightness may pose a challenge, we seea continuing strong demand backdrop, prior recent investments in labor/wages (e.g. sick pay, bonuses)and pricing power as helping to offset potential labor pressures, and support margins and earnings inthe near-term. However, we will be watching closely for any longer-term impacts from current laborsupply/demand dynamics. Given potential for more acute cost pressures for company-owned models,we favor more growth-oriented names in this subgroup (CMG, SBUX); within casual dining, we continueto prefer DRI.

Franchised valuations up meaningfully recently, but we still see upside: For heavily-franchised fast foodnames, we have seen multiples expand meaningfully in recent weeks, with the group's P/E (ex-WING,FY2) now at ~26x, ~3x turns higher since the end of February. However, relative valuation versus theS&P 500 for the franchised names does still appear reasonable versus recent historical levels, with thegroup currently at 1.3x versus the last three year average of 1.4x. We see franchised group performancenear-term driven by continued domestic trend strength—including continued solid momentum for"COVID Winners" DPZ and WING—as well as potential for international improvement and reacceleratingdevelopment. Within this group, our preferred names (in order) are MCD, DPZ and QSR.

Slightly repositioning our preference list, with CMG our overall favorite name: CMG is our overallfavorite name, given its continued strong comp momentum, accelerating unit development, andcontinued progress against margin goals. On comp momentum, 2Q guidance currently points to compsin the range of high twenties to +30% (we model +30%), and we see menu innovation (e.g. quesadillas),digital and loyalty contributing as CMG laps 2Q20's -9.8%. Meanwhile, CMG opened 40 new restaurantslast Q, marking its strongest 1Q from a development standpoint in years and setting up the companywell for its ~200 openings target this year, well above recent years' ~150 level. And finally, we point toCMG's progress against its margin algorithm goal. In the 1Q, one of the more positive developmentswe observed across the group was CMG's meaningful step forward in its efforts to close the gap in itsmargin algorithm (1Q gap ~80 bps, versus prior two Q's ~250 bps), which if closed could result in furtherupside to our and Street earnings estimates.

RBC Capital Markets, LLCChristopher Carril (Analyst)(617) 725-2109,[email protected] Gibson (Associate)(410) 905-2945,[email protected]

RBC Capital Markets appreciates your consideration in the 2021 Institutional Investor All-America Research Team survey.

Priced as of prior trading day's market close, EST (unless otherwise noted). All values in USD unless otherwise noted

Disseminated: May 6, 2021 02:28EDT; Produced: May 6, 2021 02:28EDTFor Required Conflicts Disclosures, see page 30

Summary Thoughts + Updated Rankings of Our Favorite Names

Restaurants: Looking for 1Q Strength to Continue, But Keeping a Close Eye on Costs

607092_10c45fbf-772e-49e4-ab8b-68b76e9c6e96.pdf

May 6, 2021 2

Quick Summary of Our Current Thinking on the Group

• Following generally better than expected 1Q results, we expect near-term top line strength for

restaurants to continue into 2Q as the industry continues to lap last year’s declines

• Domestic top line should see continued benefit from excess savings and stimulus payments (though

with the latter fading), with pent-up demand driving on-premise improvement as off-premise sales

remain elevated versus pre-pandemic levels

• International results will likely remain mixed in the very near-term, though should continue to improve

over the balance of the year as lockdowns ease

• However, we’ll be watching the cost picture and margins closely in the 2Q…

• Labor costs are likely the more acute margin headwind in the near-term, though we believe our

coverage is generally well-positioned to manage incremental cost pressures; while we have heard and

seen evidence of challenging restaurant labor supply/demand dynamics, there was little evidence of this

occurring during the 1Q, though this does bear watching

• How we are thinking about the group from here

• Valuations for both the fast food and casual dining group are modestly above recent historical (three-

year) averages, though relative P/E (vs. the S&P 500) suggests some room to the upside

• Looking ahead, we continue to see further upside selectively across fast food—see following slides for

rankings of our favorite names—and remain more cautious around casual dining/reopening trade, while

continuing to favor DRI there

• In fast food, we see reasons for continued comp momentum (menu innovation, digital upside), with

improvement opportunities ahead in international markets and reaccelerating development



May 6, 2021 3

RBC Restaurants Valuation Snapshot

Source: FactSet; “RBC Fast Food” excludes WING

RBC Restaurants P/E (FY2) RBC Restaurants Relative P/E (vs. S&P 500, FY2)

RBC Fast Food Restaurants P/E (FY2) RBC Casual Dining Restaurants P/E (FY2)

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May 6, 2021 4

Updated Rankings of Our Favorite Names

Source: RBC Capital Markets, company reports

“Earnings Recovery” Best Ideas

1. Chipotle Mexican Grill (CMG, PT $1,750)• We model SSS of +16% in 2021, driven by: 1) menu innovation (e.g. quesadillas); 2) opportunity to leverage 2020's digital growth

(e.g. 1:1 marketing with 21M loyalty members); and 3) share gain opportunities relative to fast food peers, given CMG's quality/value offering

• We see substantial upside near-term for CMG from reaccelerating unit growth, setting CMG further along the path to 6,000+ restaurants—from ~2,800 today—driven by improving unit economics

• On margins, while consensus continues to model RLM more conservatively than CMG’s algorithm implies (e.g. 2022 RLM at <25%, on ~$2.7M AUV), 1Q21 results imply margin targets may be more achievable than Street estimates assume, suggesting further upside to estimates

2. Starbucks (SBUX, PT $131)• We continue to view SBUX as an attractive earnings revision story over the remainder of its FY21, driven by top line accelerating

with improving macro conditions (i.e. resumption of “normalcy”), and commensurate margin expansion• We see SBUX as engaging one of the more ambitious store portfolio transformations across large brands today, by not only closing

underperforming stores, but by also growing mix of drive-thru and mobile pickup-only stores, both of which will better-position the brand against shifts in consumer behavior

• Longer-term, we also see optionality with greater licensed store mix, which could drive higher returns and multiple expansion

3. Darden Restaurants (DRI, PT $158)• DRI has benefitted from focus on its off-premise business in recent years (primarily at Olive Garden), but we see continuing

improvement in overall in-restaurant traffic as a meaningful tailwind to DRI given its longstanding focus on in-restaurant service and value

• We also see brands in DRI's business focused on fine dining (Capital Grille and Eddie V's, together ~8% of pre-COVID profits) and those with higher alcohol mix (e.g. Yard House, with over 35% pre-COVID alcohol mix) as benefitting more relative to peer brandsin an industry recovery scenario



May 6, 2021 5

Updated Rankings of Our Favorite Names (Continued)

Source: RBC Capital Markets, company reports

“Insulated Business Models” Best Ideas

1. McDonald’s (MCD, PT $258)• We see MCD as leveraging its scale over the past year-plus by substantially improving its marketing (including the highly successful

Celebrity Meals campaign) and investing in technology; updated domestic asset base (EOTF) should provide continued sales lift• MCD has more digital innovation planned for 2021, including the launch of a new loyalty program across its largest markets later

this year• MCD is also planning to open >1,300 new restaurants in 2021 (w/ nearly 500 units in the US and IOM segments), roughly on par

with total gross new restaurant growth last seen in 2014

2. Domino’s Pizza (DPZ, PT $466)• 2020 highlighted DPZ’s advantaged business model: 98% franchised; focus on value and profitable off-premise (delivery +

carryout) sales; and best-in-class digital sales mix (>70% in the US)• Challenging Y/Y SSS comparisons remain a key hurdle in 2021 (RBCe 2021 US SSS of ~+3%, against 2020 +11.5%), but a compelling

delivery value platform, greater carryout focus, further menu innovation and share gain opportunities in the fragmented pizza category should all combine to support continued momentum

• Franchisee profitability remains strong (last week’s updated avg. franchisee EBITDA data showed nearly +24% Y/Y growth in 2020), which together with the company’s fortressing strategy, should continue to drive 6%+ domestic unit growth

3. Restaurant Brands International (QSR, PT $73)• Valuation remains compelling vs. closest peers, when considering the company’s system sales growth outlook, but Tim Hortons

sales recovery—against still-challenging COVID-related impact to mobility and dining room restrictions in Canada—remains the key unlock for QSR shares, though digital investments and easing comparisons should help

• QSR remains committed to its global unit goal of 40,000 restaurants over 8-10 years (originally stated mid-2019), and 1Q’s development acceleration points to potential for a return to 2018/2019 growth levels this year



May 6, 2021 6

A Quick Review of What We Learned with 1Q Results



May 6, 2021 7

Overall Strong 1Q21 Earnings Results

Source: Company reports, FactSet

1Q21 EPS and SSS (Actual vs. Consensus Estimates)

• 1Q earnings, thus far, have largely met or exceeded expectations, driven by strong domestic

results and better than anticipated margins

Actual Consensus Delta Actual Consensus Delta

CMG $5.36 $4.92 9% 17.2% 17.6% -0.4%

DPZ $3.00 $2.94 2%

US 13.4% 9.7% 3.7%

International 11.8% 6.0% 5.8%

EAT $0.78 $0.82 -5% -3.3% -0.6% -2.7%

Chili 's (Company) 0.0% 1.8% -1.8%

MCD $1.92 $1.81 6% 7.5% 4.9% 2.6%

US 13.6% 10.2% 3.4%

Int'l Operated Mkts 0.6% -0.1% 0.7%

QSR $0.55 $0.50 10%

Tim Hortons -2.3% -2.7% 0.4%

Burger King 0.7% 0.7% 0.0%

Popeyes 1.5% 1.0% 0.5%

SBUX $0.62 $0.53 17% 15% 17.3% -2.3%

US 9% 7.4% 1.6%

China 35% 47.8% -12.8%

TXRH $0.91 $0.59 54% 18.5% 9.5% 9.0%

WING1 $0.44 $0.31 42% 20.7% 20.7% 0.0%

YUM $1.07 $0.87 23% 9% 8.3% 0.7%

KFC 8% 9.0% -1.0%

Pizza Hut 12% 11.0% 1.0%

Taco Bell 9% 5.7% 3.3%

1 Preannounced SSS (and other metrics) on 3/31

EPS Same Store Sales



May 6, 2021 8

Domestic Sales Trends Have Strengthened, But Int’l Recovery Remains Uneven

• US comps came in largely as expected, if not better, driven by:

• an overall healthy consumer, supported by record savings levels, as well as two rounds of stimulus (one

beginning late December, and then another in March);

• easing dining room capacity restrictions in large markets (e.g. TX removing all restrictions in March);

• still-elevated off-premise demand for casual dining operators (DRI, EAT, TXRH);

• average check above pre-COVID levels (SBUX, DPZ, MCD) aided by continued group ordering,

premium/higher priced items

• However, the international sales recovery remains largely mixed:

• Canada lockdowns remain a headwind for QSR’s Tim Hortons brand (given its heavy exposure to

Ontario), though MCD did call out Canada strength

• MCD highlighted positive comps in the UK and Canada, as well as strength in China and Japan, but

France and Germany comps remained negative

• YUM, meanwhile, noted overall strong performance in North America, UK, Australia and Japan, offset

by restrictions in parts of Asia and Europe

• DPZ saw its international comps improve to +11.8% in the 1Q (and two-year trend accelerate >400 bps

Q/Q), driven by performance in China, Japan and Turkey, among others

• SBUX China comps for the 2FQ were +91% (incl. VAT benefit of ~9pp), coming in below expectations



May 6, 2021 9

Restaurant Margins Showed Little Sign of Inflationary Pressures in the 1Q

Source: Company reports, FactSet

1Q21 Restaurant Level Margins (Actual vs. Consensus Estimates)

• Restaurant level margins generally came in above expectations in the 1Q, aided by top line

leverage

• While we had expected to see some pressure from recently cited labor and input cost

headwinds, we did not see much evidence of impact in the 1Q

24.4%22.3%

18.6%

15.9%13.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

WING CMG TXRH MCD EAT

Actual Consensus



May 6, 2021 10

Earnings Estimates Continue to Move Higher

Source: FactSet

2022E Consensus Earnings Estimates, by RBC Restaurant

Segment (Indexed to Estimates as of Sept. 30)

• Consensus earnings estimates for the group again moved higher following earnings, with the

most pronounced changes occurring for our casual dining coverage

• But while earnings estimates were revised higher post-1Q results, casual dining stock

performance on average has been ~flattish since March

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21

CMG/SBUX Highly-Franchised Fast Food Casual Dining

RBC Fast Food vs. Casual Dining Stock Performance

(Indexed to Nov. 2)

100.00

110.00

120.00

130.00

140.00

150.00

160.00

Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21

Fast Food Casual Dining S&P 500



May 6, 2021 11

Why We Expect to See Continued Strength Near-Term



May 6, 2021 12

Expecting Strong Demand to Continue in 2Q

• As the restaurant industry continues to lap last year’s 2Q declines, we see the overall demand

environment supportive of continued top line momentum, driven by a healthy consumer and

ongoing strong demand for both on- and off-premise dining

• 2Q sales guidance/data points from earnings include:

• MCD: the company expects US trends to “continue to outpace 2019, with two-year comp

sales growth relatively in line with Q1”, which implies a ~+22-23% comp (we model +22%);

however, in its IOM segment, while the company expects two-year growth to improve vs.

Q1, the segment will likely continue to lag 2019 until the 2H21

• CMG: guidance calls for comps in the range of high twenties to +30%; we model +30%,

lapping 2Q20’s -9.8%

• WING: management noted US comps remained positive during the first four weeks of the

2Q (an acceleration in the two-year comps); April comps in 2020 were +33.4%

• TXRH: reported April comps of +127% vs. 2020, and +20.9% vs. 2019



May 6, 2021 13

Many Consumers Expect to Spend the Same or More on Restaurants…

Source: SurveyMonkey, RBC Capital Markets

8%

26%

52%

10%

5%

0%

10%

20%

30%

40%

50%

60%

A lotmore

Somewhatmore

About thesame

Somewhatless

A lotless

Responses to Survey Question: How much do you plan to spend at restaurants (whether dine-in, delivery or takeout)

as the threat of Covid-19 fades vs. how much you spent prior to the pandemic?

• Responses from a recent survey (conducted by RBC Hardline/Broadline Retail analyst Scot

Ciccarelli) suggest roughly half of consumers do not expect to change their restaurant spending

habits, while 34% expect to spend more



May 6, 2021 14

“COVID Winners” Appear to Still Have Momentum

Source: Company reports, RBC Capital Markets

• WING reported its April trends are positive, despite lapping a +33.4% April 2020 comp

• DPZ did not provide a 2QTD update, but we view better than expected 1Q US trends (+13.4%)

as indicative of continued pizza category demand, while also implying less impact from third-

party delivery than feared

Two-Year Domestic Stacked Comp Trends for DPZ (Left) and WING (Right)

12.2%

9.9%8.7% 9.0%

5.5%

19.1%19.9%

14.6% 15.0%

0.0%

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4.0%

6.0%

8.0%

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14.0%

16.0%

18.0%

20.0%

1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21

16.6% 17.1%18.6% 18.2%

17.0%

44.7%

37.7%

30.4% 30.6%

0.0%

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15.0%

20.0%

25.0%

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45.0%

1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21



May 6, 2021 15

Off-Premise Strength Should Continue to be Additive to On-Premise Recovery

Source: Company reports, RBC Capital Markets estimates

Texas Roadhouse Average Weekly Sales and To-Go Sales Mix

• Even as capacity restrictions have eased, we have seen elevated off-premise sales

• For TXRH, April To-Go sales mix remained in the high-teens, and well above pre-

pandemic mix (HSD%), even with April comp sales >20% above 2019 levels

• EAT’s off-premise mix remains in the low-to-mid-30s% range (aided in-part by virtual

brand It’s Just Wings)

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$0

$20,000

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

To-Go Sales as % of Average Weekly Sales (RHS) Average Weekly Sales (LHS)

Dining rooms begin to reopen in

early May

Est. overall average dining room capacity

back to ~50-60%

Est. capacity reaches ~65-75%

Est. capacity ~60-65%

Est. capacity ~75-85%



May 6, 2021 16

And Off-Premise Support Should Continue as Some Guests Wait to Dine In

Source: SurveyMonkey, RBC Capital Markets

9%

15%

26%

32%

16%

3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

I never changedmy eating outhabits in the

first placebecause ofCovid-19

I don't expectmy eating out

habits to changemuch at all

I expect wewill start eating

out a lotmore than we

do today

I expect towait a few

months to starteating out more

to see howthe vaccine

progression goes

I don't expectto eat outmore until

Covid-19 lookslike it is

completelybehind us

I don't reallyexpect to eat

out at all

Responses to Survey Question: When you get the Covid-19 vaccine/the Covid-19 threat fades, how do you expect

your eating out habits to change (bars/restaurants)?

• A significant amount of respondents—nearly 50%—also indicated that they expect to wait to

dine in restaurants, either until they are comfortable with vaccine effectiveness or until the

pandemic is over

• This suggests to us that capacity constraints, at least initially, may not be a significant issue



May 6, 2021 17

Digital and Loyalty Growth at Fast Food

• As easing capacity restrictions and vaccine distribution aid on-premise dining, fast food may

feel some pressure as on-premise traffic continues to improve… One way fast food can

potentially defend against this shift is via guest loyalty programs

• We also see loyalty as an important element of the continued recovery of fast food

breakfast businesses; given the habitual nature of the morning daypart, frequency driven

by loyalty programs can help re-establish routines and preference for certain brands

• Recent and upcoming loyalty program launches include:

• MCD: testing MyMcDonald's Rewards in the US and Germany currently, with plans to

deploy later this year (in Canada, as well); currently, MCD has >20M active app users in

the US, ahead of the loyalty launch

• QSR: Tim Hortons’ Tims Rewards saw ~2M downloads in March, and mgmt noted that

“over time, the contribution to sales has been more positive” from the program; Burger

King’s Royal Perks now available nationwide in the US, while a Popeyes loyalty program is

now in test

• WEN: launched July 2020; by 4Q20, the program had ~3M active users and ~12M total

members



May 6, 2021 18

Digital and Loyalty Growth at Fast Food (Continued)

• Other recent digital/loyalty program updates include:

• SBUX: active My Starbucks Rewards membership grew to ~23M in 2FQ (+>1M Q/Q), with

52% of US company-operated sales driven by MSR members; mobile order transactions

as a % of total US company-operated transactions reached 26% (vs. 18% a year ago)

• CMG: loyalty currently at ~21M members (vs. 19.5M in 4Q), with ~60% active

• DPZ: active membership now at 27M today

• One potential risk for recent loyalty program launches is competition from existing loyalty

programs at competing brands, though we continue to see benefits from potential to drive more

transactions by current frequent brand users, as well as potential to shift away from value/price

promotions to loyalty-driven offers

• And for existing/legacy loyalty programs, we still also see opportunities to better utilize guest

data to drive more transactions (CMG) or to simply further grow loyalty membership (SBUX)



May 6, 2021 19

Development Engines Beginning to Turn Back On

Source: Company reports

Trailing Twelve Month Net New Unit Growth/Decline

• We saw a number of companies stabilize and/or reaccelerate development in the 1Q, including:

CMG, DPZ, QSR, WING and YUM

• And while previously announced plans to close underperforming locations weighed on 1Q net

new unit growth for MCD and SBUX, these closures appear to be winding down, and net

development should improve for these names in the coming Qs

(200)

0

200

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800

1,000

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1,600

SBUX DPZ YUM MCD WING CMG QSR

3Q20 4Q20 1Q21



May 6, 2021 20

Key Near-Term Margin Considerations

• The primary driver of near-term margin expansion will remain top line recovery/growth, driving

fixed cost leverage

• Incremental pricing can also help support margins, as needed;

• Pricing power noted by CMG and EAT, among others, with 1Q earnings

• Margins may also benefit from more moderate marketing spend in the near-term, as the current

demand environment—particularly for full-service/casual dining—will likely require less

advertising and promotions

• CMG guiding marketing expense to mid-2% range in 2Q, from 3.5% in 1Q

• DPZ noted it had not relied on “boost week” promotions in the 1Q, given strong demand

• For fast food restaurants, specifically, dining room closures and elevated average check have

also helped margins

• However, reopening of dining rooms will require more staffing and labor expense, which

will pressure margins

• Moderation of fast food average check—as mobility/traffic continues to improve—may also

impact margins (noted by SBUX, MCD) though we see opportunities to support check

growth through mix (e.g. premium products, beverage attach) and pricing



May 6, 2021 21

Potential Headwinds We Are Watching Closely



May 6, 2021 22

Stimulus Tailwind Likely to See Diminishing Returns

Source: Internal Revenue Service

• As noted earlier, 1Q benefited from not one, but two rounds of stimulus payments to

consumers, including ~$380B distributed from mid-March through late April

• While late-1Q stimulus payments also coincided with reduced dining room restrictions—thus

making it difficult to isolate the benefit from stimulus, alone—we will be watching for any

discernible drop-off in the tailwind from the increase in cash available to consumers

Total Weekly Stimulus Payments ($B)

$242B

$83B

$10B

$36B

$3B $3B $4B

$0B

$50B

$100B

$150B

$200B

$250B

$300B

3/12 3/19 3/26 4/2 4/9 4/16 4/23

Comp Restaurant Sales Decline/Growth (vs. 2019 Levels)

Weeks Ending 2/28 3/7 3/14 3/21 3/28

Knapp Track (Industry) -13.3% -9.2% 6.9% 2.3%

DRI -15.9% -13.9% -11.1% 5.4%

Olive Garden -17.4% -15.3% -11.6% 5.7%

LongHorn -3.4% 0.3% 3.8% 23.2%

Source: Knapp Track, company reports



May 6, 2021 23

Labor Market Dynamics

• Overall tone from company managements suggested that their respective sales recoveries,

along with labor investments over the past year (e.g. frontline worker bonuses), have set them

up well as “employers of choice,” relative to others in the restaurant industry

• Furthermore, some companies noted that current labor pressures may just be a short-term

issue requiring upfront hiring incentives as business continues to ramp back up (particularly in

full service), rather than a long-term structural headwind

• Some companies have also noted potential pricing power to help offset labor cost pressures

(e.g. CMG, EAT)

• And while moderating tailwind from stimulus payments may negatively impact top line, a

potential benefit is that as we move further away from stimulus, labor supply may increase

• In certain cases, companies noted labor issues at the supply chain level (e.g. SBUX, TXRH,

WING); as such, we will watch for indirect labor pressures in other parts of the P&L

• Overall, we believe that while our companies are generally well-positioned within the

industry to withstand near-term headwinds—given sales improvement &

scale/leverage—we will be watching closely for evidence of long-term impact to labor

costs; we also believe that labor pressures may impact smaller operators/independents

more acutely



May 6, 2021 24

Selected 1Q21 Earnings Commentary Re: Labor Costs

CMG

• “… in the last year, what we’ve seen with labor inflation has – it’s been more modest than it had been in the last five years. In the

last five years we’ve seen inflation in kind of the mid-single-digit range. And with some of the dislocations going on with COVID,

actually, the labor inflation dropped to the low single digits.”

DPZ

• “… everybody sees a lot of the technology investments that we make on the front end. There’s a lot that we do on the back end to

try and improve the efficiency of the labor in store, take some of the labor out of stores and enable that same labor to be doing other

things. So whether it’s tools related to the make line, or other initiatives that we’re doing to try and drive throughput in the stores and

trying to reduce the labor required on a daily, hourly basis, there – it’s at the forefront of everybody’s mind right now.”

• “… something we think about a lot is both the availability and the cost of labor and in particular, the real pinch point in the business

is drivers. So part of what we’re doing and working on is, trying to continue to make that a great job with the best economics for

drivers, relative to the other alternatives that they have out there. And we’ve talked about a number of strategies around that. We

continue our work around fortressing to give drivers more deliveries per hour, which translates into higher wages. We’re working on

technology and operating practices that keep drivers in their cars.”

EAT

• “… there are some additional things we’re doing to entice and to recruit, but for the most part they’re more variable. And there are

incentives to get people to join, and not so much about the long-term wage rate impact that we’ll live with for a longer period of time.

So we feel good about that. We also feel good about the fact that we’re just not out there as aggressively having to hire, because

we just didn’t cut as many, and we didn’t cut any manager. So those are things that are keeping us probably in a little bit of a better

situation than maybe some that didn’t kind of fare as well as we did through the pandemic. So again, more short-term impacts than

longer-term, and we’ll continue to monitor this and see how it plays out over the next couple of months.”

• “… I think in the past we talked about labor inflation, we’ve typically looked at that 3% to 5% kind of range was the normal

conversation we had about labor inflation that includes the overtime and training and bonus structures. We deploy probably, I think

in the short run running at the higher end of that level. That’s the numbers I talked about for Q4 embed that thought process into it.

And we’ll see it as it develops, but we’re very comfortable, we have the all the tools in place to manage through this short term.”

Source: Company earnings call commentary, FactSet



May 6, 2021 25

Selected 1Q21 Earnings Commentary Re: Labor Costs (Continued)

SBUX

• “What I would add to that is currently in certain markets at certain times we are experiencing some labor shortages, but it is not a

widespread issue at this time. And as Kevin said, we’ve invested ahead of the curve with our industry-leading benefits and total pay

approach, and I feel confident that we will continue to make the necessary investments required to remain a premium employer of

choice. Now we have, obviously, continued to watch this very closely over the next few months unfolds to ensure that we are

continuing but operating stores in a way that team keep up with customer demand.”

• “… in some areas in supply chain, let’s take a distribution where store deliveries. Now, some of our partners who run the store

deliveries or from our customer distribution centers to stores, they’ve struggled a bit being able to hire and staff to meet the demand

that we have and to get enough people. So we are working with them. So I do anticipate we’ll do a little bit more to invest and help

our supply chain partners, whether it’s staff that they need in manufacturing or staffing they need for distribution and transportation.”

TXRH

• “As we move forward, there remains a need to continue to bolster our staffing levels given the pace of sales recovery we have

experienced over the last several months, which we expect to result in higher labor cost.”

• “We will be kind of lapping the bump we took when we were To-Go-only and we were doing minimum wage for those tips

employees. So, we took a bit of a hit there in 2020. So, we will be lapping that kind of starting – that kind of started in April. So, you

may get a little bit benefit there just looking y-over-y. But I would expect that those wage pressures continue. And I think when you

saw the stores, on the scarcity thing, I think initially as the sales started ramping up fast, you did have, where it was tough to find

people, because you were trying to do it really quickly. I think they’ve gotten much, much better at that. We’ve provided so many

resources and really worked with them to make sure that we’re taking care of that and getting them there. But it’s both staffing,

finding folks in a wage rate issue, depending on what part of the country you’re in.”

WING

• “Until we see a marked change in the availability of labor for poultry producers, a labor shortage that we believe is largely fueled by

the amount of government stimulus, we anticipate that wing prices could remain elevated for the balance of 2021.”

• “We are certainly aware that the market is difficult for staffing on all fronts, driven by the fact that we have this huge stimulus that's

creating challenging wage rates comparisons, if you will, by way of it. And so, with DoorDash in particular, we're not experiencing

anything that's impacting the business. I know they've been challenged by it. But overall, our business performance I think

demonstrates that they've been able to keep the drivers staffed in supporting our business.”




May 6, 2021 26

Food Costs/Supply Chain Outlook

Source: ArrowStream

ArrowStream Restaurant Commodity Index

• No significant shifts in the commodity cost outlook, per managements’ 1Q commentary

• WING now estimates food costs of ~42% for 2021, given wing cost pressures

• TXRH raised its 2021 commodity cost inflation outlook to ~+4%, from its prior ~+3%, citing

uncertainty around proteins and oils

• CMG also noted some seasonal pressure from avocado pricing in 2Q

• While contracting should keep food costs in check in the NT, we will continue to watch for

potential impact later in the year from rising commodity costs



May 6, 2021 27

Selected 1Q21 Earnings Commentary Re: Food Costs/Supply Chain

CMG

• “… I think everyone’s kind of waiting to see what happens in terms of demand and if there are any disruptions with supply chain.

We’re not seeing any that we’re worried about right now, but with everyone talking about with the stimulus and the reopening and

the vaccine, there is going to be a surge in demand, and we think we’re well prepared from a supply chain standpoint.”

• “In terms of commodities, the one that we’re seeing for sure, and this is more of a seasonal shift that we see pretty much every year,

is avocados. We are going to see an increase in avocado prices as we shift into the next season. We don’t see anything else

moving up dramatically right now…”

EAT

• “The commentary around those spot pressures is what you typically will see out there, doesn’t come into play, as you say, in the

next couple of quarters because of the contracting positions we’ve built. So we are protected really across all of our major

commodity components for the rest of this FY. And then you build a lot of protections into the proteins and things of that nature as

you get through the CY and even out into the beginnings of calendar 2022. I mean, there are – distribution channels are still

unwinding and those do have impacts from time-to-time.”

• “Again, the nationwide distribution channels that we’ve established and the relationships we have with those… mainline carriers are

very solid and are in place and are delivering for the restaurants. So, again, scale matters and support systems matter in this case.

And we have just an excellent supply chain group, particularly when it comes to the logistical side of the equation. So it can be an

all hands on deck, experience is different time-to-time. But we’re working through all of those issues and are not seeing the broad-

based disruptions that you hear about from some folks. So real pleased with the way that they’re performing there. But – and again,

that supply chain will sort itself out. I think the disruptions are sporadic more than systemic and will correct themselves...”

TXRH

• “We updated our full year inflation expectation to approximately 4% due to uncertainty on supply and demand throughout the

remainder of 2021, particularly on proteins and oils.”

• “There’s definitely pressures now. I think, Q2, we expect to see those higher levels of inflation. There could be some opportunities

for that to moderate in the back half of the year, just depending on different things happening, the suppliers continue to struggle and

be challenged by labor. You continue to see weather impacts from Q1 impacting some of the supply and just overall demand being

as high as it is across the industry is creating some pressure. So, right now, our expectation on that 4% on a full-year would be

pretty evenly spread over the next three quarters.”




May 6, 2021 28

Selected 1Q21 Earnings Commentary Re: Food Costs/Supply Chain (Continued)


WING

• “We believe that these prices are likely to continue to be elevated in 2021 as suppliers are struggling, just as many in our industry

are, to hire people to process chicken, thus placing unexpected pressure on the amount of birds that can be processed and

negatively affecting supply of all parts of the chicken in the US, not just wings.”

• “But we feel confident that we've got the right strategic partnerships with our suppliers and we have assured supply. And we're

going to continue to lean into that. But we feel comfortable as we sit here today with our ability to manage to the number we guided

on food costs of roughly 42%. But again, I think the X factor if you will is whether or not there's any further stimulus.”



May 6, 2021 29

Restaurants: Looking for 1Q Strength to Continue, But Keeping aClose Eye on Costs

Companies mentionedBrinker International, Inc. (NYSE: EAT US; $63.75; Sector Perform)Chipotle Mexican Grill, Inc. (NYSE: CMG US; $1,426.50; Outperform)Darden Restaurants, Inc. (NYSE: DRI US; $142.23; Outperform)Domino's Pizza, Inc. (NYSE: DPZ US; $431.89; Outperform)McDonald's Corporation (NYSE: MCD US; $235.04; Outperform)Restaurant Brands International Inc. (NYSE: QSR US; $69.01; Outperform)Starbucks Corporation (NASDAQ: SBUX US; $113.48; Outperform)Texas Roadhouse, Inc. (NASDAQ: TXRH US; $104.77; Sector Perform)Wingstop Inc. (NASDAQ: WING US; $153.62; Sector Perform)Yum! Brands, Inc. (NYSE: YUM US; $121.09; Sector Perform)

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restaurants: looking for 1q strength to continue, but

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