Piggyback Plant? Colu lumbia bia Univ niversit ity Securit - - PowerPoint PPT Presentation

Pig-in-a-Poke or Piggyback Plant?

Colu lumbia bia Univ niversit ity Securit itie ies Analy alysis is

John M. Zolidis March 5, 2020

Presenter Bio – John Zolidis

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➢Founded Quo Vadis Capital, an equity research consultancy and Registered Investment Advisor (RIA) in 2017 ➢Analyst following U.S. consumer sector since 1999 ➢Named to Wall Street Journal’s Best on the Street list in 2005 ➢Frequently cited in the financial media ➢Education at Kenyon College & Oxford of University (Mansfield College) ➢Former PhD candidate in Philosophy ➢Presented at value investment conferences in Vail, Klosters and Cyprus ➢Based mostly in Paris, France

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

About the Quo Vadis Capital, Inc.

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➢Registered Investment Adviser (RIA) formed in 2017 ➢Outsourced analyst model providing research on the restaurant and retail sectors to institutional investors ➢Also provide consulting and advisory to companies ➢Manager of separate investment accounts for individuals ➢Produced out of New York and Paris, France ➢More information at quovadiscapital.com

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

What is a Pig-in-a-Poke?

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

What is a Piggyback Plant?

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

What is the Central Problem of Ethics?

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

You Still Have to Make Decisions

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

What is the Most Difficult Problem in Investing?

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

There is no one right way to analyze companies, construct a portfolio, or adjudicate between investment alternatives You have to find what works for you and then stick with it

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Our Premise:

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Changes in expectations for future earnings or cash flows are the most reliable predictor for stock price performance My suggestion: Investors should focus on identifying when embedded expectations in an equity could be wrong

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two Part Process:

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Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow Part 2) Valuation Review to Attempt to Determine What’s Priced In

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

How do we determine When Future Expectations for Earnings or Cash Flow are Wrong?

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

It frequently comes down to doing work that others can’t or won’t

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Unit Level Economic Analysis

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This process was developed for retail and restaurants, but the idea is applicable for any company or business that can be divided into component parts

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Unit Level Economic Analysis

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Further, the task is to take the company’s component parts and run a fundamental analysis at the unit level Among the fundamental we care about most is evaluating unit level ROIC

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Simplistic Retail Business Model:

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Simplistic Retail Business Model:

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Simplistic Restaurant Business Model:

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

• CORP. HQ

MARKETING & BRANDING RESTAURANT CUSTOMERS THE STORE IS THE ECONOMIC ENGINE FOR A RESTAURANT Produces the “R” in ROIC COST CENTER

Simplistic Restaurant Business Model:

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

• CORP. HQ

MARKETING & BRANDING RESTO CUSTOMERS ADDING MORE LOCATIONS CREATES OPPORTUNITY TO LEVERAGE CORP. HQ & MARKETING SPEND RESTO RESTO RESTO CUSTOMERS CUSTOMERS CUSTOMERS

Simplistic Restaurant Business Model:

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

• CORP. HQ

MARKETING & BRANDING RESTO CUSTOMERS RESTAURANT OPERATORS CAN ALSO ENTER INTO FRANCHISE ARRANGEMENTS TO GROW VIA OTHER’S CAPITAL RESTO RESTO RESTO CUSTOMERS CUSTOMERS CUSTOMERS RESTO RESTO RESTO

Unit Level Economic Analysis

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The restaurant and retail business models have in common a centralized cost structure and many locations which can be evaluated independently First step is to ask whether the “box” is any good

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two Part Process:

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Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow a) Solve for Unit-Level ROIC Part 2) Valuation Review to Attempt to Determine What’s Priced In

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Comparison of 15 Resto Company Unit Level ROIC

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Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE

Estimated Average Restaurant-Level Lease-adj. ROIC TTM Ending With 3Q19

30.5% 29.2% 29.0% 26.3% 24.7% 23.7% 23.0% 22.2% 22.1% 20.6% 19.1% 18.4% 17.7% 16.3% 16.2% 15.8%

12.0% 17.0% 22.0% 27.0% 32.0%

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two Part Process:

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Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow a) Solve for Unit-Level ROIC b) Evaluate composition of ROIC Part 2) Valuation Review to Attempt to Determine What’s Priced In

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Comparison of 15 Resto Company Unit Level ROIC

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE; Period Presented is TTM Ended with 2Q19

ESTIMATED AVERAGE UNIT CASH-ON-CASH PRE-TAX RETURN RESTAURANT LEVEL MARGINS ESTIMATED AVERAGE UNIT LEASE-ADJUSTED PRE-TAX ROIC ESTIMATED SALES PER AVERAGE SQUARE FOOT

$1,359 $913 $833 $800 $780 $738 $701 $653 $651 $535 $515 $487 $435 $431 $308 $266 $- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 28% 25% 24% 21% 19% 19% 19% 18% 18% 17% 17% 17% 17% 15% 15% 13% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 30% 30% 28% 26% 25% 24% 23% 23% 22% 21% 20% 18% 18% 17% 16% 16% 12% 17% 22% 27% 32% 57% 52% 49% 48% 35% 33% 33% 31% 30% 30% 24% 23% 23% 19% 18% 16% 0% 10% 20% 30% 40% 50% 60%

Two Part Process:

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Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow a) Solve for Unit-Level ROIC b) Evaluate composition of ROIC c) Identify trends in ROIC Part 2) Valuation Review to Attempt to Determine What’s Priced In

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Trend Work For Unit Level ROIC

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Lease-adj. Store Level TTM ROIC

40.0% 38.2% 36.7% 35.2% 35.9% 36.8% 36.4% 36.7% 37.1% 37.4% 36.7% 36.2% 35.8% 35.3% 34.3% 33.8% 33.3% 33.1% 33.2% 30.0% 32.0% 34.0% 36.0% 38.0% 40.0% 42.0%

Oct15 A Jan16A Apr16A Jul16A Oct16A Jan17A Apr17A Jul17A Oct17A Jan18A(1) Apr18A Jul18A Oct18A Jan19A Apr19A Jul19A Oct19A Jan20A Apr20E

~700 BPS DECLINE IN UNIT LEVEL ROIC OVER FIVE YEARS

Two Part Process:

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Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow a) Solve for Unit-Level ROIC b) Evaluate composition of ROIC c) Identify trends in ROIC d) Evaluate the causes for changes in ROIC Part 2) Valuation Review to Attempt to Determine What’s Priced In

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two Part Process:

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Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow a) Solve for Unit-Level ROIC b) Evaluate composition of ROIC c) Identify trends in ROIC d) Evaluate the causes for changes in ROIC e) Solve for trends and inflection points in Return

• n Incremental Invested Capital (ROIIC)

Part 2) Valuation Review to Attempt to Determine What’s Priced In

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

What Is Return on Incremental Invested Capital (ROIIC)

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ROIIC is a measure of the return generated by most recent dollar a company has invested in its business For growth restaurant or retail companies, it is the ROIC generated by the most recently opened locations ROIIC is the key tool we use to evaluate consensus expectations and identify when forward estimates are wrong

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Higher Sales & Margins are Driving Rising ROIIC

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Lease-Adj. Estimated New Store TTM ROIC NEW (NON-COMP) UNIT TTM AUV $M ESTIMATED NEW UNIT TTM RESTO LEVEL MARGIN YOY % CHANGE IN UNITS

$1.62 $1.64 $1.66 $1.66 $1.77 $1.87 $1.98 $1.94 $1.92 $1.20 $1.30 $1.40 $1.50 $1.60 $1.70 $1.80 $1.90 $2.00 $2.10

Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19A Dec19A Mar20E

17.3% 17.7% 18.4% 18.6% 20.2% 21.8% 23.7% 22.8% 21.4% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0% 26.0%

Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19A Dec19A Mar20E

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

Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19A Dec19A Mar20E

13.3% 13.6% 14.2% 14.3% 15.9% 16.9% 18.1% 17.3% 17.1% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0% 19.0%

Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19A Dec19A Mar20E

Rising (or Falling) ROIIC Indicates Structural Change

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Higher productivity and returns at new units typically correlates with ➢Rising EBIT or EBITDA margins ➢Upward revisions to earnings ➢Accelerating growth in earnings All factors that tend to lead to a positive stock price performance and justify higher valuations

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two Part Process:

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Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow a) Solve for Unit-Level ROIC b) Evaluate composition of ROIC c) Identify trends in ROIC d) Evaluate the causes for changes in ROIC e) Solve for trends and inflection points in Return on Incremental Invested Capital (ROIIC) f) Evaluate existing estimates using ROIC/ ROIIC work Part 2) Valuation Review to Attempt to Determine What’s Priced In

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Unit Level Economic Analysis – Moving to Part 2

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So we’ve used unit level economic analysis to break a company into component parts, we solved for ROIC, we determined what is responsible for the company’s return profile, we conducted a peer group compare and identified

• trends. We even calculated ROIIC and used this as a tool to

evaluate consensus. Our work showed us that estimates are likely too high or too

• low. Are we ready to act on the stock?

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two Part Process:

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Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow Part 2) Valuation Review to Attempt to Determine What’s Priced In a) Estimate the Value of the Existing Business

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Valuation

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We are not going to address any of the commonly known valuation techniques Each of these generally has its uses but also problems; No Valuation approach works in all cases Biggest challenge for traditional valuation techniques is addressing businesses with a lot of potential growth

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Unit Level Valuation Tool

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Created to work with unit level economic analysis as an alternative approach for multi-year growth stories This tool 1) breaks out an estimated value for a company’s existing business, and derives what the market is paying for the growth component

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Unit Level Valuation Tool

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How do we value the existing business? a) Estimate cash flow produced by

• perations

less maintenance capex b) Assign market multiple to this cash flow/ per share c) Can use modest risk adjustment The idea is that a company’s repeatable cash flows should trade at a multiple relatively similar to the overall equity market

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two Part Process:

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Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow Part 2) Valuation Review to Attempt to Determine What’s Priced In a) Estimate the Value of the Existing Business b) Derive what the market is paying for growth component

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Unit Level Valuation Tool

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How do we estimate what the market is paying for a company’s future growth? a) Use our estimate of the value of the business b) Subtract from total enterprise value (EV) a stock is currently trading

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two Part Process:

41

Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow Part 2) Valuation Review to Attempt to Determine What’s Priced In a) Estimate the Value of the Existing Business b) Derive what the market is paying for growth component c) Calculate our own estimate for the value of future unit growth

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Unit Level Valuation Tool

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How do we independently estimate the value of a company’s growth? a) We run a unit level DCF using our store-level metrics, incorporating any trends from our analysis, and a schedule for future deployment of capital b) This generates a value of future stores based on cash flow forecasts and discounted for time value

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two Part Process:

43

Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow Part 2) Valuation Review to Attempt to Determine What’s Priced In a) Estimate the Value of the Existing Business b) Derive what the market is paying for growth component c) Calculate our own estimate for the value of future unit growth d) Delta in implied market value for growth vs. our estimate tells us whether shares are over or under valued

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Case Study #1 Shake Shack

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Two-year return ~100%

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

SHAK Trade at >100 P/E on 2020 EPS

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What does that indicate to you about investor expectations?

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

3/5/2020 AVG.

BJRI CAKE CBRL CHUY CMG EAT LK NDLS PLAY RRGB SBUX SHAK TXRH YUMC

Recent Price $30.61 $33.06

$143.28

$19.18 $737.0 $33.2 $39.93 $7.42 $30.74 $21.38 $76.67 $53.51 $56.01 $44.19 Mkt Cap ($B) $0.6 $1.5 $3.4 $0.3 $20.9 $1.3 $9.6 $0.3 $1.0 $0.3 $91.3 $2.1 $3.9 $17.1 ENT VALUE ($B)* $0.7 $1.4 $3.9 $0.3 $20.7 $2.4 $8.8 $0.4 $1.6 $0.4 $108.8 $2.0 $3.8 $15.4 Valuation Metrics*

• Vs. 2019E EPS (P/E)

21.2x 14.7 12.7 15.5 19.2 52.5 8.4 N/M 42.8 10.8 34.5 27.1 74.3 22.8 23.8

• Vs. 2020E EPS (P/E)

23.2x 15.9 11.9 15.9 17.5 40.1 7.6 N/M 29.2 10.3 50.1 25.5 101.3 20.4 50.8

• Vs. 2021E EPS (P/E)

19.6x 14.3 11.0 15.3 15.6 31.6 7.1 24.6 22.4 9.3 40.0 22.3 87.1 18.7 22.3 EV / 2020 Sales 1.3x 0.6 0.5 1.2 0.7 3.3 0.7 5.1 0.8 1.1 0.3 3.8 2.8 1.3 1.9 EV / 2019E EBITDA 10.6x 6.0 6.7 9.8 7.7 29.8 5.6 N/M 10.0 5.8 4.4 18.6 24.2 11.6 10.8 EV / 2020E EBITDA 10.0x 6.0 5.9 9.6 7.2 22.3 5.9 N/M 8.7 5.6 4.6 17.1 22.3 10.8 16.9 EV / 2021E EBITDA 8.6x 5.7 5.6 9.4 6.7 18.5 5.8 15.8 7.7 5.3 4.4 15.5 18.8 10.0 10.1 Free Cash Flow Yield ('20) 6.7% 9.6% 8.6% 6.2% 5.3% 2.7% 14.3% N/A NA 8.9% 14.4% NA 0.8% 3.6%

• 0.2%

Dividend Yield 1.3% 1.3% 4.2% 3.7% 0.0% 0.0% 4.6% 0.0% 0.0% 0.0% 0.0% 1.7% 0.0% 2.1% 1.0%

Quo Vadis Capital, Inc. Restaurant Universe Relative Growth, Profitability, Balance Sheet & Valuation Metrics (Consensus Forecasts)

Why are people so excited about SHAK?

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➢ The company has a hot brand and people love the product (burgers, fries and shakes) ➢ Unit-level metrics are exceptional ➢ The company is growing units at a very fast rate ➢ It is easy to envision SHAK growing its unit base several multiples of the current business ➢ Optionality on the balance sheet

The multiple and the stock performance represent investor anticipation of the long-term growth potential, not near- term margin trends, cash flow, or earnings

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Part 1) A&B Calc & Analyze Unit ROIC: SHAK Ranks Near The Top

48

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE; Period Presented is TTM Ended with 2Q19

ESTIMATED AVERAGE UNIT CASH-ON-CASH PRE-TAX RETURN RESTAURANT LEVEL MARGINS ESTIMATED AVERAGE UNIT LEASE-ADJUSTED PRE-TAX ROIC ESTIMATED SALES PER AVERAGE SQUARE FOOT

$1,359 $917 $833 $800 $780 $738 $701 $653 $652 $651 $535 $515 $487 $435 $431 $308 $266 $- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 28% 25% 24% 21% 19% 19% 19% 18% 18% 17% 17% 17% 17% 15% 15% 13% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 30% 30% 28% 26% 25% 24% 23% 23% 22% 21% 20% 18% 18% 17% 16% 16% 12% 17% 22% 27% 32% 57% 52% 49% 48% 35% 33% 33% 31% 30% 30% 24% 23% 23% 19% 18% 16% 0% 10% 20% 30% 40% 50% 60%

Part 1, C) Identify Trends Unit ROIC: Down ~900 bps from Peak

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

• Down nearly ~900 bps from Peak

Lease-adj. Store-Level Estimated Average Store TTM ROIC

32.1% 33.9% 34.7% 35.7% 35.7% 35.5% 34.7% 34.3% 33.4% 32.9% 32.6% 32.9% 32.9% 32.9% 32.2% 31.0% 29.7% 28.8% 27.6% 26.5% 21.0% 23.0% 25.0% 27.0% 29.0% 31.0% 33.0% 35.0% 37.0%

Jun15A Sep15A Dec15A Mar16A Jun16A Sep16A Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19A Dec19A Mar20E

Part 1 D&E: Calc New Unit ROIIC: New Units Opening Weaker

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Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Source: Company reports and Quo Vadis Capital, Inc. estimates; Calculated using 24 month delay for new units to enter comp base.

Lease-Adj. Estimated New Store TTM ROIC ESTIMATED NEW SHAK LEVEL MARGIN TTM SALES PER AVERAGE NEW STORE ($M) RATE OF UNIT GROWTH YOY% CHG QUARTER END

$4.1 $4.0 $3.8 $3.69 $3.7 $3.6 $3.6 $3.4 $3.4 $3.0 $3.2 $3.4 $3.6 $3.8 $4.0 $4.2 $4.4

Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19A Dec19A Mar20E

DOWN 20% OVER TWO YEARS

32.7% 32.3% 34.4% 36.7% 35.8% 40.0% 41.1% 31.5% 34.9% 25.0% 27.0% 29.0% 31.0% 33.0% 35.0% 37.0% 39.0% 41.0% 43.0%

Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19A Dec19A Mar20E

RATE OF GROWTH WILL SLOW IN 2020

23.6% 22.9% 21.7% 20.4% 19.2% 18.5% 18.2% 17.5% 17.2% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 23.0% 24.0% 25.0%

Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19A Dec19A Mar20E

NEW SHAK MARGIN ESTIMATED BELOW 18-22% TARGET

25.1% 25.1% 25.4% 25.1% 23.7% 21.1% 19.5% 19.0% 17.8% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0% 26.0% 28.0%

Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19A Dec19A Mar20E

ESTIMATING >700 BPS DECLINE OVER TWO YEARS

Rising (or Falling) ROIIC Indicates Structural Change

51

Lower productivity and returns at new units typically correlates with ➢Falling EBIT or EBITDA margins ➢Downward revisions to earnings ➢Decelerating growth in earnings All factors that are present in SHAK results

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

But what’s priced in at >100 P/E?

52

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Part 2, a) Estimate Value of Existing Biz: Calc at 1/3 of Mkt Value

53

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

• Stock

FY19 EBIT CF/ share from existing biz Market Multiple (8% CF yield) Estimated value of existing biz Current price per share Current Market Value % of Market Value Provided by Existing Biz CMG

$495

$16.66 12.0x $5,673 $769.76 $21,375 GO

$70

$0.76 12.0x $847 $32.71 $2,908

SHAK $28 $1.55 12.0x $713 $56.20 $2,158 33%

FIVE

$215

$3.43 12.0x $2,305 $98.18 $5,466 OLLI

$173

$1.70 12.0x $1,342 $50.00 $3,183 BOOT

$78

$1.88 12.0x $662 $28.75 $827 DG

$2,279

$7.31 12.0x $22,600 $160.16 $40,777 SBUX

$4,624

$4.86 12.0x $69,506 $79.67 $93,509 ULTA

$891

$13.89 12.0x $9,625 $268.84 $15,367

Part 2, b) Derive Market Value for Growth Option: ~$35 per share of $56 share price

54

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

• Stock

Estimated value of existing biz Net cash (debt)** Market EV ($M) Implied market value of growth

• ption

per share % of current market value related to growth CMG $5,673 $343 $21,032 $15,359 73% GO $847 ($449) $3,357 $2,510 75%

SHAK $713 $85 $2,073 $1,361 35.44 $ 66%

FIVE $2,305 $349 $5,117 $2,813 55% OLLI $1,342 $103 $3,080 $1,738 56% BOOT $662 ($158) $985 $322 33% DG $22,600 ($2,797) $43,574 $20,974 48%

Part 2, c) Independently Estimate Value of Growth Using Unit Economics ~$19 per share, Market is overpaying by nearly 2x

55

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Stock Current Number of stores Discounted Value of after tax CF from to- be opened stores $M Estimated per share value of new stores Market's Valuation of Growth Component % Market is Overvaluating or Undervaluing Growth Component CMG

2781

1,651 $ $58.19 SBUX

33353

7,302 $ $6.13 GO

347

595 $ $6.38 DG 16094 4,982 $ $19.33 DOL-TSE

1291

897 $ $2.82 ULTA 1241 2,186 $ $37.84

SHAK 151 734 $ $19.15 35.44 $ 85%

BOOT

261

181 $ $6.15 TXRH 498 571 $ $8.17 FIVE 894 1,704 $ $30.43 OLLI 345 1,223 $ $18.62 DLTR

15755

3,691 $ $15.54 YUMC 7171 3,997 $ $10.33

Recap of Two-Part Process for Shake Shack (SHAK)

56

Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow ➢Strong but deteriorating unit level ROIC ➢New units in Terrible downtrend; ROIIC weakening Part 2) Valuation Review to Attempt to Determine What’s Priced In ➢Estimated that current business worth only 1/3 of market value ➢Independently estimated value of new units to be worth roughly ½ what the market is paying

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Conclusion: Shake Shack (SHAK)

57

Investors are materially overpaying for SHAK’s ability to grow at more than 100x P/E See unfavorable trends in ROIC at existing and new units driving downward revisions to Street estimates Expect valuation contraction as market re-values its expectations with updated view of new unit value creation Conclusion of our work : the stock should be sold

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Is the Market Overvalued?

58

The financial media and others frequently refer to valuation metrics of the S&P 500 relative to historical averages But is that a valid way to judge?

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Is the Market Overvalued? S&P500

59

Source: JDP Capital Management

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Is the Market Overvalued? S&P 500

60

Source: JDP Capital Management

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Is the Market Overvalued? S&P 500

61

Source: JDP Capital Management

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Is the Market Overvalued? S&P 500

62

Source: JDP Capital Management

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Is the Market Overvalued? S&P 500

63

Source: JDP Capital Management

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Is the Market Overvalued? S&P 500

64

Media and others constantly refer to the S&P 500 as if it were ONE THING But the reality is that the composition of the S&P500 has changed dramatically over time with the current weighting favoring higher margin and lower capex-requiring companies Comparing valuation measures of the current index to the past does not yield a valid conclusion about the “market multiple”

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Corona Mania: No Thinking or Lateral Thinking

65

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Disclosures

66

General Disclosures: Quo Vadis Capital, Inc. (“Quo Vadis”) is an independent research provider offering research and consulting services. The research products are for institutional investors only. The price target, if any, contained in this report represents the analyst’s application of a formula to certain metrics derived from actual and estimated future performance of the company. Analysts may use various formulas tailored to the facts and circumstances surrounding a specific company to arrive at the price target. Various risk factors may impede the company’s securities from achieving the analyst’s price target, such as an unfavorable macroeconomic environment, a failure of the company to perform as expected, the departure of key personnel or other events or circumstances that cannot be reasonably anticipated at the time the price target is calculated. Quo Vadis may change the price target on this company without

• notice. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from

sources Quo Vadis believes to be reliable; however, Quo Vadis does not guarantee its accuracy and does not purport to be complete. Opinion is as of the date of the report unless labeled otherwise and is subject to change without notice. Updates may be provided based on developments and events and as otherwise appropriate. Updates may be restricted based on regulatory requirements or other considerations. Consequently, there should be no assumption that updates will be made. Quo Vadis disclaims any warranty of any kind, whether express or implied, as to any matter whatsoever relating to this research report and any analysis, discussion or trade ideas contained herein. This research report is provided on an "as is" basis for use at your own risk, and neither Quo Vadis nor its affiliates are liable for any damages or injury resulting from use of this information. This report should not be construed as advice designed to meet the particular investment needs of any investor or as an offer or solicitation to buy or sell the securities or financial instruments mentioned herein. This report is provided for information purposes only and does not represent an offer or solicitation in any jurisdiction where such offer would be prohibited. Commentary regarding the future direction of financial markets is illustrative and is not intended to predict actual results, which may differ substantially from the opinions expressed herein. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. The analyst who is the author of this report does not have a position in shares of the companies that are the subjects of this report. However, Quo Vadis prohibits analysts from trading in a way that is inconsistent with opinions expressed in reports [subject to exceptions for unanticipated significant changes in the personal financial circumstances of the analyst]. This report may not be reproduced in part or in whole. Please do not redistribute this report. Reg AC Certification: All of the views expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or

• issuers. No part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views

expressed by the research analyst in the subject company of this research report.

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Appendix: Characteristics of Successful Long Ideas:

67

1) Expected upside to consensus estimates and/ or positive earnings revisions 2) Rising EBIT or EBITDA margins, 3) A rising trend in ROIC or ROIIC, or stable ROIC at attractive levels, and 4) Accelerating or maintained growth at attractive levels.

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Appendix: Characteristics of Successful Short Ideas:

68

1) Expected downside to consensus estimates and/ or negative earnings revisions, 2) Contracting EBIT or EBITDA margins, 3) Deteriorating ROIC, an unfavorable trend in ROIIC, poor

• verall ROIC profile or poor capital allocation

4) Decelerating growth.

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com

Appendix: What’s Wrong with Traditional Equity Research

69

Most equity research looks and feels the same and is produced with an approach that has not changed in more than 20 years. This research product suffers from: 1. Regulatory constraints: Regulators have codified what should be or not be in a research report, how it can be distributed, even what kind of language to use or not use. 2. Technology has made it obsolete: New sources of information and digital trading have removed any edge analysts had and reduced their ability to execute transactions. 3. Over distribution and public dissemination of ratings: Most shops distribute their product to 1,000s of accounts and publish their ratings and estimates on shared platforms, thereby diluting any advantage this product may have created. 4. Conflicts of Interest: Analysts are conflicted via the requirements of corporate finance departments, upper management directives, the need to obtain NDRs, and demands from institutional sales and trading desks. 5. No edge: Most research consists of earnings previews and reviews and generally just adheres to company guidance without any proprietary process to evaluate forecasts.

Pig-in-a-Poke or Piggyback Plant John Zolidis

john.zolidis@quovadiscapital.com