1Q:21 Investor Calls: Key Points & Analysis

• Results for 1Q21 were very positive as the industry slowly, but surely gets back to normal. The good news is that dine-in demand is mostly limited by capacity restrictions as opposed to consumer fear. Also, it seems that off-premise seems able to retain elevated sales levels even as the sit-down business returns.
• An acceleration in digital adoption is not only improving convenience, but also operator efficiency. Further, robust digital order platforms are facilitating much more cost-effective and targeted one-to-one marketing, thus helping the brands to wean themselves from costly, mass marketing TV advertisements.
• QSR’s top-line also benefits from the chicken sandwich war which is helping fuel a seemingly insatiable consumer demand for this menu option.
• On the cost side, labor remains the major story. Despite an elevated unemployment rate, operators find themselves facing a severe labor shortage as exceptionally generous government direct payments lessens the drive to work a job. It remains to be seen the impact on the long-term wage rate that will result from such intense recruiting competition currently. In any case, we see a big push towards driving labor efficiencies through digital ordering and tech automation.
• Also, ramping food inflation is another key story for the quarter, driven by supply chain shortages that have resulted from labor inefficiencies at the producer level. The Fed believes this inflation will be transitory, and we certainly hope so.
• While development guidance is beginning to ramp-up (and closures appear manageable), it is hard to understand how significant inflation in building materials and construction labor will not weigh-in on growth.

Digital/Off-Premise Overview

• OLO reports that the digital comp on its platform grew +44% y/y during 12/19, increasing to +156% y/y during 12/20. Further, OLO reports that delivery mix was expected to grow to at least +10% in 2020 (considered low relative to other retail industries) with total off-premise expected to contribute +70% to +80% of total restaurant industry growth in the next 5 years. This compares with 3% of total restaurant orders fulfilled through delivery in 2018 with 39% for take-out, 21% from drive-thru and 37% dine-in.
• DoorDash reported +219% y/y 1Q21 growth in total orders to 329MM.
• Grubhub also reported strong 1Q21 results (+44% y/y growth in average daily Grubs and +38% in active diners).
• 1Q21 digital/off-premise trends continue to grow, especially for the sit-down chains as evident below.

Casual Segment Overview

• Casual results are teasing with the potential to easily outperform 2019 levels despite remaining government restrictions, boosted by the retention of new-found off-premise sales with further help from the addition of virtual delivery-only brands.
• Applebee’s was able to generate record high AWS during March & April even while its average dining capacity remains limited by restrictions.
• Cheesecake reported significant pent-up demand across the country and annualized AUVs which exceeded 2019 levels.
• Outback reported that stores in GA, TN, TX & AL generated initial 2Q21 comps that were up +15% to +20% on a 2-year stacked basis.
• Chili’s reported that 75% of company units generated “meaningful positive results” and also that improving dining room sales are helping to increase its mix of high margin alcoholic beverage, app & dessert sales.
• Olive Garden reported that its off-premise business has attracted new, younger customers who exhibit higher frequency than existing customers.

Family Segment Overview

• While family players are clearly on the mend, they continue to be challenged by their orientation towards a lower income demo (which has been disproportionately impacted by the lockdowns) and because of their sit-down breakfast orientation (a daypart which also has been hurt the most by lingering lockdown restrictions).
• Denny’s reported that California (25% of its system stores) was restricted to off-premise only through the middle of March and attributed to -6% of its quarterly comp decline.
• Denny’s also noted that post-lockdown traffic from the boomers has held-up as this demo has been relatively more impervious to job furloughs. On the other hand, Millennial traffic weakness has reflected a greater impact from job loss.
• IHOP also mentioned that: government capacity restrictions are particularly difficult given its historical concentration of sit-down sales during the weekend; and, correspondingly, that it is difficult to staff during weekends and late-night (unpopular shifts for a labor force with more options provided by government stimulus).

QSR Burger Segment Overview

• QSR burger chains continued to gain overall industry share during 1Q21 as post-lockdown consumers persist in their demand for drive-thru access (which has become faster given menu simplification, limited dine-in traffic & increasing digital mix).
• While it remains to be seen to what extent a return to normal for dine-in will reverse drive-thru share gains, it does appear that the QSR players have stepped-up their game to the benefit of their long-term positioning.
• While Burger King’s 2-year stacked results were basically flat, going forward results should benefit from its new “best-in-class” chicken sandwich, its new everyday value menu and a new loyalty program.
• Jack’s double-digit 2-year stacked comp growth reflected strength in every daypart, particularly during late-night. Momentum is expected to sustain even as California brings-up the rear in loosening its dine-in restrictions.
• McDonald’s 2-year stacked comps also increased double-digit across all dayparts with strength in delivery and digital.
• Similarly, Wendy’s 2-year stacked comps increased double-digit, helped by breakfast, digital, innovation and stimulus.

Pizza Segment Overview

• Pizza continues to deliver given its positioning as an affordable comfort food (good for groups) with great access options. Loyalty programs are also helping to leverage even more value to improve frequency. Having said this, the current labor shortage does not portend well for such a delivery dependent segment.
• To this end, Domino’s seeks to better emphasize carryout which generates a higher margin. Increasing awareness of its carside delivery access is helping alleviate ongoing carry-out traffic pressure.
• Papa John’s is enjoying record setting growth helped by menu innovation and explosive increases in its digital & loyalty customers.

Chicken Segment Overview

• The chicken segment continues to perform well as an affordable comfort food (good for groups) that is well suited to off-premise. The chicken sandwich wars have also done wonders in driving awareness and traffic, helping to rejuvenate a segment which had become pigeon-holed because of the stigma of fried bone-in chicken.
• To this end, KFC reported that its 1Q21 2-year stacked comps increased +11%, helped by incremental, high-frequency sales of its chicken sandwiches which are performing at 2x+ the volumes of its prior sandwich launches.
• Popeyes reported a 1Q21 2-year stacked comp increase of +30.1%, attributed to its chicken sandwich which is driving broad consumer awareness & trial as well as growth across bone-in, boneless & seafood.
• Wingstop brought to attention the segment’s Achille’s heal, reporting that spot prices for bone-in wings were up +50% and that prices for all chicken parts (including wings) are expected to remain elevated throughout 2021 as suppliers struggle to hire sufficient people to process chickens.

Mexican Segment Overview

• The Mexican segment had a strong quarter, marked by Chipotle’s resurgence and strong results from both Taco Bell and Del Taco.
• Notably, Chipotle’s digital sales grew +133.9% (to 50.1% sales mix) and more than half of its digital sales were driven by high margin pick-up orders. This is instrumental for a concept which lacks a drive-thru origin.
• Taco Bell’s +10% 2-year stacked comp growth was driven by: a kick-off for the quarter with the return of Nacho Fries (offered in the $5 Nacho Fries Box); and by the intro of its 1st digital-led product launch (the $5 Build Your Own Cravings Box) which drove a meaningful loyalty membership increase.
• While Del Taco posted solid system-wide sales growth, its non-California restaurants generated a dramatic +16% comp increase

Coffee Segment Overview

• Even Starbucks’ quarterly results rebounded strongly despite the chain’s historic positioning as a sit-down destination with a strong orientation towards breakfast.
• Notably, drive-thru window sales drove 50%+ of net sales, up from 10%+ pre-lockdown. This trend has helped lower wait times, thus improving the customer experience.
• Starbucks Rewards also contributed to sales growth, driving 52% of mix during the quarter with total 90-day active members increasing 1MM+ to 22.9MM (such a high mix is notable given that 100MM come to Starbucks every week). Frequency for members is 2-3x more than non-members