Restaurant Industry Commentary & Q3 2017 SSS Update What’s Inside This Commentary Fast Casual: Q3 2017 saw the fast casual segment turn in a decrease of 3.4% for its seventh consecutive quarter of SSS Same-Store Sales Discussion 1 decreases after 26 quarters of SSS increases from Q3 2009 to Same-Store Sales Data 2 Q4 2015. Pie Five’s losses continued to accelerate as the pizza concept posted a 17.3% decrease, its sixth consecutive The Restaurant Industry’s Fastest Growing 4 double-digit decrease. After bouncing back from five Segment – Delivery consecutive quarters of sales declines in Q1 2017, Chipotle Government Policy’s Increasing Impact on Business 5 (+1.0%) lost momentum on yet another food safety issue. Published: February 2018 Excluding Chipotle, only El Pollo Loco (+1.7%) posted a positive comp. Even Shake Shack – after sizzling same-store Same-Store Sales Discussion sales performance following its IPO in January 2015 – turned in a third consecutive quarter of negative comps. During the third quarter of 2017 (“Q3 2017”), the restaurant Family Dining: Struggles for the family dining segment industry saw mostly weak same-store sales (“SSS”) results. On continued in Q3 2017 as four of the six concepts we track average, restaurant same-store sales decreased 1.5% year- posted SSS decreases. After 11 quarters of growth for the over-year (“YOY”) in Q3 2017. Of the 64 companies we follow, segment as a whole, this marks the fourth consecutive quarter only 21, or 33%, enjoyed positive same-store sales growth. of decreases. Chuck E. Cheese has seen a steady decline in Data over the last several quarters have showed a consistent same-store sales performance over the past two years – going slowdown for the industry. Q3 2017 extended the streak of from +6.0% in Q1 2016 to -6.9% in Q3 2017. industry SSS decreases to six quarters. Casual Dining: Downward trends in casual dining QSR: As the chart below illustrates, QSR continued to be a accelerated in Q3 2017 as SSS declined 2.4% YOY. Of the 24 bright spot in the restaurant industry in Q3 2017, with 14 of the concepts we follow, 17 experienced sales declines for the 23 concepts we track turning in positive same-store sales quarter. Taco Cabana (-12.6%) suffered the biggest loss, growth. The segment as a whole was up 0.4% YOY, continuing followed by Applebee’s with a 7.7% decline for its ninth its steady growth. Mexican concepts led the segment at 3.6% consecutive quarterly decrease. On a positive note, growth as Taco Bell (+3.0%) and Del Taco (+4.1%) both turned steakhouse chains, Texas Roadhouse and LongHorn, along in strong results. Chicken concepts continued to struggle in Q3 with Olive Garden, posted SSS growth and have now 2017 and were down 3.7% on average, led by another large produced growth for 12+ quarters in a row. decrease at Pollo Tropical (-10.9% following -7.7% in Q2) and a third consecutive negative quarter for Popeye’s (-2.6%). Fine Dining: The fine dining segment saw mixed results with Domino’s strong performance continued for yet another SSS growth of 0.3% on average, despite negative comps from quarter – its +8.4% growth was the second worst result of the three of five concepts we track. Fine dining sales have yet to past 12 quarters. fully recover to pre-recession levels and are still below 2007 sales. A 1.6% decline broke Ruth’s Chris’s streak of 29 Indexed SSS by Segment (2007 to Q3 2017) consecutive quarters with positive comps, while Sullivan’s 45.0% bounced back and led the segment with a +7.7% increase 30.0% after trailing the segment in the last quarter. 15.0% Restaurant industry performance was generally lackluster – through three quarters of 2017. Always in a highly competitive (15.0%) space, restaurant operators now find themselves facing a (30.0%) rapidly shifting technological and cultural landscape. Those who innovate – while also maintaining focus on the QSR Fast Casual fundamentals of quality, service and cleanliness – should Family Dining Casual Dining continue to prosper in this changing environment. Fine Dining Contributing Editor Aaron Edwards is an Associate at Trinity Capital. Source: Restaurant Research LLC, Technomic and company filings Page | 1 Restaurant Industry Commentary and Q3 2017 SSS Update Same-Store Sales Data FY 2014 FY 2015 FY 2016 FY 2017 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 QSR Chicken Bojangles 7.0% 7.9% 4.4% 4.1% 0.6% 2.0% 0.2% 0.8% 2.4% (1.7%) (1.4%) (2.2%) Church's 3.6% 2.8% (2.6%) (4.8%) (4.6%) (4.2%) (2.5%) (1.8%) (1.3%) (1.0%) 0.2% N/A KFC 6.0% 7.0% 3.0% 0.0% 3.0% 1.0% 2.0% 6.0% 4.0% 2.0% 2.0% 1.0% Pollo Tropical 7.7% 6.4% 4.3% 4.2% 0.4% 0.0% (1.4%) (1.0%) (4.0%) (6.7%) (7.7%) (10.9%) Popeye's 10.7% 7.0% 7.9% 5.6% 2.0% 1.1% 0.0% 1.5% 3.0% (0.4%) (3.3%) (2.6%) Mean 7.0% 6.2% 3.4% 1.8% 0.3% (0.0%) (0.3%) 1.1% 0.8% (1.6%) (2.0%) (3.7%) Coffee/Snack Baskin Robbins 9.3% 8.0% 3.4% 7.5% 4.4% 5.0% 0.6% (0.9%) 0.9% (2.4%) (0.9%) 0.4% Dunkin Donuts 1.4% 2.7% 2.9% 1.1% 1.8% 2.0% 0.5% 2.0% 1.9% 0.0% 0.8% 0.6% Jamba Juice 4.9% 5.0% (5.9%) 6.6% 5.4% (2.1%) 4.2% (1.1%) (2.2%) (5.8%) 0.0% N/A Starbucks 5.0% 7.0% 8.0% 9.0% 9.0% 7.0% 4.0% 4.0% 3.0% 3.0% 5.0% 2.0% Tim Horton's 4.1% 8.9% 7.0% 4.3% 5.8% 5.8% 5.9% 4.5% 3.6% (0.1%) (0.8%) 0.3% Mean 4.9% 6.3% 3.1% 5.7% 5.3% 3.5% 3.0% 1.7% 1.4% (1.1%) 0.8% 0.8% M exican Del Taco N/A 7.7% 6.0% 5.6% 5.8% 3.2% 3.3% 6.7% 5.5% 4.2% 7.1% 4.1% Taco Bell 7.0% 6.0% 6.0% 4.0% 4.0% 1.0% (1.0%) 3.0% 3.0% 8.0% 4.0% 3.0% Mean 7.0% 6.9% 6.0% 4.8% 4.9% 2.1% 1.2% 4.9% 4.3% 6.1% 5.6% 3.6% Pizza Domino's 11.1% 14.5% 12.8% 10.5% 10.7% 6.4% 9.7% 13.0% 12.2% 10.2% 9.5% 8.4% Papa John's 4.1% 6.5% 5.5% 3.0% 1.9% 0.1% 4.8% 5.5% 3.8% 2.0% 1.4% 1.0% Papa Murphy's N/A 5.6% 4.5% 1.4% (3.1%) (3.0%) (4.0%) (5.8%) (7.8%) (5.0%) (4.3%) (4.1%) Pizza Hut 0.0% (1.0%) 1.0% 0.0% 2.0% 5.0% 1.0% (2.0%) (4.0%) (7.0%) (3.0%) 0.0% Pizza Inn 6.4% 6.0% 0.2% (1.1%) (1.7%) (2.2%) 0.3% 0.2% (1.2%) 0.1% (9.5%) 1.4% Mean 5.4% 6.3% 4.8% 2.8% 2.0% 1.3% 2.4% 2.2% 0.6% 0.1% (1.2%) 1.3% Sandwich Arby's 4.9% 9.7% 7.6% 9.6% 5.5% 5.8% 3.7% 2.4% 3.1% 1.6% 3.7% N/A Burger King 4.2% 6.9% 7.9% 5.2% 2.8% 4.4% (0.8%) (0.5%) 1.8% (2.2%) 3.0% 4.0% Jack in the Box 4.4% 8.9% 7.3% 6.2% 1.4% 0.0% 1.1% 2.0% 3.1% (0.8%) (0.2%) (1.0%) McDonald's (1.7%) (2.6%) (2.0%) 0.9% 5.7% 5.4% 1.8% 1.3% (1.3%) 1.7% 3.9% 4.1% Sonic Drive-In 8.5% 11.5% 6.1% 4.9% 5.3% 6.5% 2.0% (2.0%) (2.0%) (7.4%) (1.2%) (3.3%) Wendy's 1.7% 3.2% 2.2% 3.1% 4.8% 3.6% 0.4% 1.4% 0.8% 1.6% 3.2% 2.0% Mean 3.7% 6.3% 4.9% 5.0% 4.3% 4.3% 1.4% 0.8% 0.9% (0.9%) 2.1% 1.2% Mean Total QSR 5.3% 6.3% 4.2% 4.0% 3.2% 2.3% 1.6% 1.7% 1.2% (0.3%) 0.5% 0.4% Fast Casual Chipotle 16.1% 10.4% 4.3% 2.6% (14.6%) (29.7%) (23.6%) (21.9%) (4.8%) 17.8% 8.1% 1.0% El Pollo Loco 7.6% 3.5% 1.3% 0.0% 1.8% 0.7% 2.4% 1.6% (1.3%) (0.3%) 2.9% 1.7% Fuddrucker's 0.2% 2.1% 0.2% 1.7% 1.3% 0.0% (1.0%) (0.8%) (1.6%) (1.1%) (0.9%) (3.6%) Noodles & Company 1.3% 0.9% 0.1% (0.9%) (1.1%) (0.1%) (1.0%) (0.7%) (1.3%) (2.0%) (3.4%) (3.5%) Panera Bread 3.0% 0.7% 1.8% 2.8% 2.3% 4.7% 2.3% 1.7% 0.7% 2.6% N/A N/A Pie Five 16.9% 9.5% 6.7% 1.5% (1.6%) (4.0%) (12.0%) (14.7%) (17.4%) (15.8%) (16.2%) (17.3%) Potbelly 3.7% 5.4% 4.9% 3.7% 3.7% 3.7% 1.7% 0.6% 0.1% (3.1%) (4.9%) (4.8%) Qdoba Mexican Grill 14.0% 8.3% 7.7% 6.6% 1.5% 2.1% 0.6% 0.8% (1.0%) (3.2%) 0.5% (2.1%) Shake Shack 7.2% 11.7% 12.9% 17.1% 11.0% 9.9% 4.5% 2.9% 1.6% (2.5%) (1.8%) (1.6%) Zoe's Kitchen 7.8% N/A 5.6% 4.5% 7.7% 8.1% 4.0% 2.4% 0.7% (3.3%) (3.8%) (0.5%) Mean 7.8% 5.8% 4.6% 4.0% 1.2% (0.5%) (2.2%) (2.8%) (2.4%) (1.1%) (2.2%) (3.4%) Source: Restaurant Research LLC, Capital IQ, Technomic and company filings Page | 2 Restaurant Industry Commentary and Q3 2017 SSS Update Same-Store Sales Data (Cont.) FY 2014 FY 2015 FY 2016 FY 2017 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Family Dining Bob Evans 3.8% 2.1% (0.3%) (3.2%) (3.6%) (3.0%) (2.0%) (2.2%) (2.6%) (3.9%) N/A N/A Chuck E Cheese / Peter Piper(1.4%) Pizza (5.0%) 3.0% 0.7% 1.3% 6.0% 2.6% 3.7% (1.6%) (2.8%) (3.8%) (6.9%) Cracker Barrel 7.9% 5.2% 3.8% 2.5% 0.6% 2.3% 3.2% 1.3% 0.6% (0.4%) (0.8%) 0.2% Denny's 4.7% 7.2% 7.3% 6.1% 2.9% 2.5% (0.5%) 1.0% 0.5% (1.1%) 2.6% 0.6% IHOP 6.1% 4.8% 6.2% 5.8% 1.4% 1.5% 0.2% (0.1%) (2.1%) (1.7%) (2.6%) (3.2%) Luby's 0.2% 3.1% (1.0%) 0.2% 1.2% 3.1% (0.2%) 0.0% (2.2%) (4.4%) (2.5%) (4.5%) Steak n Shake 2.9% 6.0% 4.8% 3.0% 3.6% 1.8% (0.7%) 0.2% (0.4%) (3.3%) (3.1%) (2.2%) Mean 3.5% 3.3% 3.4% 2.2% 1.1% 2.0% 0.4% 0.6% (1.1%) (2.5%) (1.7%) (2.7%) Casual Dining Applebee's 2.8% 2.9% 1.0% (0.5%) (2.5%) (3.7%) (4.2%) (5.2%) (7.2%) (7.9%) (6.2%) (7.7%) Bahama Breeze (0.6%) 3.2% 1.8% 1.8% 2.4% 9.9% 4.7% 3.9% 2.6% 0.5% 1.4% 1.2% BJ's Restaurants 1.2% 3.2% 0.5% 2.3% 0.7% 0.6% (0.2%) (3.4%) (2.2%) (1.3%) (1.4%) (1.7%) Bonefish 0.7% 0.9% (4.6%) (6.1%) (5.4%) (2.7%) 0.9% 1.7% (1.9%) (0.8%) (2.6%) (4.3%) Bravo! Cucina Italiana (3.9%) (1.7%) (2.1%) (3.1%) (5.2%) (4.1%) (8.4%) (8.0%) (7.5%) (2.9%) (1.1%) (2.7%) Brick House Tavern + Tap 5.7% 5.4% 2.8% (0.7%) (2.8%) (4.5%) (6.3%) (8.9%) 0.0% 0.0% 0.0% 0.0% Brio Tuscan Grille (4.2%) (1.0%) (1.6%) (3.8%) (4.3%) (2.1%) (6.4%) (3.7%) (4.3%) (1.9%) (0.9%) (7.4%) Buffalo Wild Wings 5.5% 6.5% 3.3% 2.6% 1.0% (2.0%) (2.3%) (1.7%) (4.0%) 0.6% (1.2%) (2.3%) Carrabba's Italian Grill 0.3% 1.9% 0.9% (2.0%) (4.0%) (2.0%) (4.8%) (2.1%) (2.3%) (3.8%) 0.4% (2.8%) Cheesecake Factory 1.4% 4.2% 2.8% 2.2% 1.1% 1.7% 0.3% 1.7% 1.1% 0.3% (0.5%) (2.3%) Chili's Grill & Bar 4.2% 2.2% 0.1% (1.1%) (2.1%) (3.6%) (1.8%) (1.3%) (3.2%) (1.7%) (1.7%) (3.0%) Chuy's 3.8% 1.9% N/A 4.2% 3.2% 3.2% 1.0% 0.3% (1.1%) (0.7%) (0.1%) (2.1%) Dave & Buster's 10.5% 9.9% 11.0% 8.8% 6.0% 3.6% 1.0% 5.9% 3.2% 2.2% 1.1% (1.3%) Famous