TABLE OF CONTENTS
Industry Overview.................................................................................................................................................... 3
As the year begins, investors were hiding in QSR ................................................................................................ 3
Transaction declines and pricing have driven casual dining beats ....................................................................... 4
The early cycle low hanging fruit has already been picked, so now what? .......................................................... 4
What’s the consensus view? ............................................................................................................................ 5
Where are we different? .................................................................................................................................. 5
Increasingly elastic demand could lead to 2H09 sales shortfalls ...................................................................... 6
For the casual dining industry, mix is now negative for the first time ever ........................................................ 6
Fundamentals are bottoming but it’s likely to be a bumpy ride ............................................................................. 8
Four key determinants of fundamental performance in a weak environment ................................................... 8
Growth is not a business strategy; it is the outcome of a viable business strategy .............................................. 10
Historical growth rates won’t return even when the economy strengthens ........................................................... 10
Be wary of historical P/E multiples as a proxy for future casual dining valuation ................................................. 11
Consensus growth rates are at the higher end of what we would expect in steady state .................................... 12
Staying market neutral is the best bet in our view ................................................................................................ 12
Valuation Framework – Restaurants ..................................................................................................................... 14
Brinker International, Inc (EAT) – Outperform, $20 Price Target ....................................................................... 15
Burger King (BKC) – Outperform, $18 Price Target ............................................................................................ 18
CKE Restaurants (CKR) – Outperform, $11 Price Target .................................................................................... 21
The Cheesecake Factory (CAKE) – Underperform, $17 Price Target ................................................................ 23
Chipotle Mexican Grill (CMG) – Underperform, $66 Price Target ...................................................................... 25
Darden Restaurants, Inc (DRI) – Neutral, $35 Price Target ................................................................................. 27
Jack in the Box (JACK) – Neutral, $24 Price Target ............................................................................................ 30
McDonald’s Corporation (MCD) – Outperform, $63 Price Target ....................................................................... 33
Panera Bread (PNRA) – Neutral, $54 Price Target ............................................................................................... 35
Sonic Corporation (SONC) – Underperform, $9 Price Target ............................................................................. 38
YUM! Brands (YUM) – Neutral, $34 Price Target .................................................................................................. 40
Appendix - Commodities .........................................................................................................................................43
Appendix Company Models .................................................................................................................................... 44