arbys january 2012

Arby’s – January 2012 1

Restaurant Research ChainRestaurantData.com

Arby’s Concept Report Parent Company Market Cap LTM Stock Performance S&P Debt Rating

Arby’s Restaurant Group N/a Private N/a

1. Marketing & Menu Strategy

Arby’s continues to pursue a turn-around of its brand which has struggled dramatically since the onset of the great recession. Past attempts to reposition the chain have failed to move the needle as Arby’s struggles with how to build brand equity on a foundation of roast beef. New management and ownership is currently looking hard at how the brand fits into the QSR marketplace by seeking to define a target market coupled with a plan of how to reach it. However, we suspect that Arby’s real work is to consider how to leverage its uniqueness by making roast beef cool again. If Starbucks can convince the world that caffeine is fashionable, maybe Arby’s could do the same with red meat. This will require operational improvements, facility upgrades and a reinvigorated franchisee base. Fortunately, sales stability provides new brand management with some breathing room which could be just the break Arby’s needs to get going.

Target

Market

Arby’s is in the process of defining a primary target market while also assessing the best method to reach it. As part of this initiative, the company hired the Boston Consulting Group to conduct a brand analysis and help refine Arby’s vision. While traditional heavy fast food users (18 – 34) skewing slightly male have been Arby’s historical focus, more recently the chain has been seeking to attract (1) Medium Arby’s Customers (“MACs”), and (2) lapsed customers who have moved on to fast casual through its premium Ultimate Angus roast beef line. Notably, Arby’s heavy user frequency tends to be lower than other QSR chains as a result of: (1) higher price points, and (2) its relatively narrow roast beef focus.

Menu Roast beef represents Arby’s staple and accounts for as much as 60% to 70% of sandwich sales (varying by market with a higher percentage in the middle of the country). The new Ultimate Angus line, which has been well received, features premium sliced whole muscle roast beef and currently drives an estimated 15% of sales (with Arby’s regular roast beef sandwiches which are available in a variety of sizes and topping options comprising the remaining 45% to 55%). Arby’s Market Fresh premium sliced turkey and chicken sandwiches (including 2 wraps and 2 salads) are the chain’s next best-selling line at roughly 10% of sales. A three item Toasted Subs line generates about 5% of sales and is primarily driven by the French Dip & Swiss as both the Classic Italian and Turkey Bacon subs are now optional by market. Chicken offerings include the Prime-Cut line (4 sandwiches in crispy or roasted) and boneless chicken tenders (upgraded in 2010). Unique side items include mozzarella sticks, loaded potato bites, Steakhouse onion rings, jalapeno bites, curly fries, Homestyle fries (regional option) and potato cakes. Dessert consists of apple, cherry & chocolate turnovers, vanilla, chocolate or Jamocha shakes and Chocolate Chunk cookies. A 10 item value menu debuted in April 2010 and has been expanded to include apple slices and Kraft Macaroni & cheese. Arby’s breakfast menu (available in 10% - 15% of the system and accounting for ~5% of sales at those stores) features an assortment of biscuit, croissant and sourdough sandwiches, wraps, a sausage gravy biscuit, Outside-In Cinnamon Bites pastry and coffee which was also recently standardized throughout the system. As part of an ongoing menu rationalization effort (designed to simplify operations and improve service), the following slow selling items have been eliminated: the $5.01 combo line (4 sandwiches), RoastBurger line, FruiTeas, 1 toasted sub and onion petals. Menu development is currently focused on limited time offers with the goal of adding popular items to the permanent menu as well as product line extensions (with a particular focus on the Angus line). Finally, its kids’ menu was expanded in October with a Jr. turkey & cheese sandwich, Kraft macaroni & cheese and apple slices with yogurt that can be substituted for fries.

Ads Arby’s current ad campaign debuted in February 2011 featuring the new slogan “It’s Good Mood Food” which also coincided with the launch of the Ultimate Angus line. The campaign was created by BBDO (hired late 2010) and is designed to portray Arby’s food as “exciting taste that you can feel better about every day”. Commercials feature a spokesman named R.B. (named after Arby’s founders) who touts the chain’s sandwiches as “Good Mood Food” through the use of corny humor and singing to show that although people might have differences of opinion, they can all get along thanks to Arby’s. We note that Arby’s just hired a new CMO (Russ Klein who was previously Burger King’s CMO) and that the ongoing brand/ad assessment suggest future marketing tweaks. During 2011, Arby’s ran 4 national ad campaigns and 5 are planned for 2012. Since each national campaign airs once per month, regional/local co-ops are responsible for promoting Arby’s the balance of the year through local TV, radio and direct mail.

Promos Since the launch of its “Good Mood Food” campaign, Arby’s has been focusing more on premium promotions (with new Angus extensions and LTOs such as the Super Reuben Market Fresh sandwich, fish sandwich and seasonal shakes) and less on value. As a result, we estimate value menu sales have decreased from the high teens last year to 10% - 12% currently. Print coupons (more prevalent in non-media efficient markets and when there are no national ads) generally feature bundled deals such as two can dine for $8.99 (2 drinks, 2 sandwiches & 2 fries), 3 beef & cheddar for $5 and 2 French Dip for $5. Facebook promotions typically offer a specific $1 off coupon to members who "Like" Arby's.

Category Pages Category Pages 1. Strategy 1-2 6. Unit Growth 7-8 2. System Stats 3 7. Build vs. Buy 9 3. Sales Performance 4 8. Remodeling 10-11 4. Operational Overview 5 9. Franchisee Overview 12 5. Unit Level Economics 6



Recent Promotions Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12

Angus Cool Deli (sandwich or wrap), Jamocha Oreo shake LTO, Value Menu

Angus Cool Deli (sandwich or wrap), Jamocha Oreo shake LTO, Value Menu

Ultimate Angus Philly, Jamocha Oreo shake LTO



Fish sandwich, Jamocha Cream

Pie

Bold products represent new items.

Source: RR

Ad Spending

Estimated Total Marketing Spend Franchisee Mandated Ad Contribution

2010 % of System Sales Media Focus % of Unit Sales National/Local

$116 Million 4.2% Primarily national cable television but also print, radio & social media

4.2% 1.25% - 3.1%/ 2.95% - 1.1%

Ad Fees In an effort to increase its national media presence (which has suffered from a shrinking ad budget driven by the system’s sharp sales declines), Arby’s went from a flat rate to a tiered rate advertising structure (based upon the allocation of the national ad contribution). Beginning in April 2010, the required national ad contribution rate was increased from 1.2% of sales to a tiered rate structure currently ranging between 1.25% and 3.5% (depending on the market). The franchisor (Arby’s Restaurant Group) partially subsidized the increased ad spending in 2011 for the two markets with the highest required contribution rates. The difference between the 4.2% total ad spending requirement and the national contribution is spent on local and/or co-op advertising. Local/co-op advertising generally consists of regional network and cable television, radio and direct mail inserts. Every domestic Arby’s franchisee is required to participate in the AFA Service Corporation which manages national advertising content and placement for the Arby’s system. Notably, the company is reassessing its marketing fund allocation system and has hired a consultant to manage the review process with results expected in March 2012.

Agencies Arby’s appointed BBDO New York as its new advertising agency in late 2010 (replacing Omnicom Group’s Merkley & Partners of New York).

$1,296

$533 $418 $315 $311 $167 $146 $144 $116 $91 $74 $48 $34

$0

$500

$1,000

$1,500

$2,000

2010 Estimated Total Domestic Chain Ad Expenditures - SandwichSegment$ Millions

0

25

50

75

100

Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

QSR Sandwich Tier 2 - Google Web Search Interest

Carl's Jr. Hardee's Arby's Jack in the Box Sonic Chick-fil-A Quiznos Jimmy John's

Chain

Total

Items

Value

Menu

Value %

SalesBreakfast Sides Entrees

Desserts

& Shakes

Average

Check Breakfast Lunch Dinner

Late

Night/

Snack

Dine-

in

Take-out/

Drive-thru

Arby's 61 14 10% 15 8 31 7 $ 7.50 2% 60% 34% 5% 30% 70%

Average (1) 58 6 17% 11 5 31 11 6.61$ 13% 52% 29% N/a 25% 75%

Sandwich

(1) Average based on 14 chains (Arby's, Burger King, Carl's, Chick-fil-A, Hardee's, Jack in the Box, Jimmy John's, McDonald's, Quizno's, Sonic,

Subway, Taco Bell, Wendy's and Whataburger).



2. Arby’s System Statistics Summary

$32.4

$10.7 $8.8 $7.9 $6.9$3.6 $3.6 $2.9 $2.8 $2.7 $1.8 $1.4 $1.2 $1.2 $0.8

$-

$10.0

$20.0

$30.0

$40.0

Bil

lio

ns

Sandwich Segment Competitors by 2010 Domestic System-wide Sales

FYE December 2006 2007 2008 2009 20105 yr. ('06 -'10)

Average

System-wide Sales ('000) 3,090,200 3,160,000 3,255,000 2,980,000 2,760,000

YOY Growth in System-wide Sales 5.5% 2.3% 3.0% -8.4% -7.4% -1.0%

Segment Sales ('000) 77,317,400 80,621,100 85,582,365 86,927,380 88,471,668

YOY Growth in Segment Sales 5.3% 4.3% 6.2% 1.6% 1.8% 3.8%

Concept's Segment Market Share 4.0% 3.9% 3.8% 3.4% 3.1%

YOY Change in Concept Market Share 0.0% -0.1% -0.1% -0.4% -0.3% -0.2%

Franchised 5.0% 1.0% -3.6% -9.0% -5.2% -2.4%

Company 1.0% -2.0% -5.8% -8.2% -7.1% -4.4%

Total System 3.0% 0.0% -4.0% -8.8% -5.8% -3.1%

Segment Avg. 3.2% 2.7% 3.9% -1.1% 1.0% 1.9%

Franchised 2,399 2,458 2,456 2,418 2,367

Company 1,059 1,105 1,176 1,169 1,144

Total 3,458 3,563 3,632 3,587 3,511

% Growth Rate/Existing Units 2.4% 3.0% 1.9% -1.2% -2.1% 0.8%

Segment Avg. 2.3% 1.8% 1.4% 0.6% 0.8% 1.4%

Franchised 95 95 82 49 29

Company 37 51 40 5 0

Total 132 146 122 54 29

% Growth Rate/Existing Units 3.9% 4.2% 3.4% 1.5% 0.8% 2.8%

Segment Avg. 4.5% 3.6% 3.5% 3.2% 3.7% 3.7%

Franchised Transfers 3.0% 4.4% 2.4% 3.7% 2.2% 3.2%

Franchised Closings 1.5% 1.1% 1.5% 3.1% 3.6% 2.2%

Company Closings 1.2% 1.4% 1.4% 2.0% 1.5% 1.5%

System Closings 1.4% 1.2% 1.5% 2.7% 2.9% 1.9%

Segment Closings 2.3% 1.8% 2.1% 2.6% 2.9% 2.3%

Gross New Unit Development

Transfers & Closure Rates

Same Store Sales

Unit Counts

Domestic System Statistics

System-wide sales



3. Sales Performance

Comp Sales

Performance � Arby’s dramatic sales declines appear to have bottomed in 4Q:10 (breaking a streak of 10 negative

quarters) and are finally beginning to recoup some of those losses.

� When the company went private in July 2011 it began reporting only annual sales results. During FYE 2011, comps increased +5.5% and we believe mid to high single digit growth was posted during 4Q:11. We note Arby’s sales have been more volatile over the last year with some regional variations including stronger sales in the upper Midwest but weaker results in the Pacific Northwest and West Coast.

� 2011 sales growth reflects both price increases and improving customer traffic which are benefitting from: (1) the new “Good Mood Food” marketing campaign, and (2) an emphasis on premium new products including the Angus roast beef sandwich line. While the everyday value menu has been deemphasized, it still represents a significant 10% - 12% of sales and provides a viable option for value driven customers (which was not available prior to April 2010).

� We attribute Arby’s significant comp declines during the 2008 – 2010 period to: (1) the weak economy and heavy competitor discounting which hit the chain disproportionately hard due to its high $7.50 check average and lack of a value menu, (2) a drop in weekend business (which still has not recovered), and (3) ineffective/inconsistent advertising which was also adversely impacted by a smaller ad budget and less air time due to the sharp 15% decrease in system-wide sales.

Sales

Outlook and

Drivers

� Although the company is not providing comp sales guidance, Arby’s current momentum (driven by its new ads, Angus line and selective price increases) suggests a slightly positive comp bias (+1% to +3%) for 2012 with stronger results likely skewed towards the second half of the year to allow time for new management to complete and implement its marketing and menu initiatives.

Market

Share � Arby’s steady market share losses over the last 5 years are attributable to below average comp sales

results which was further aggravated by net unit declines during 2009 and 2010.

Source: RR

4.0% 3.9% 3.8%3.4%

3.1%

2%

3%

4%

5%

2006 2007 2008 2009 2010

Arby's Share of $1B+ Sandwich Chains

-11.0% -11.5%-7.4% -5.9%

2.0%5.5%

-16%-12%-8%-4%0%4%8%

4Q:09 1Q:10 2Q:10 3Q:10 4Q:10 1Q:11 2Q:11 3Q:11

Arby's System-wide Comp Performance vs. Sandwich Segment

Arby's Sandwich $1B+ Chain Summary



4. Operational Overview

Summary � Arby’s is increasing its operational focus to improve the system’s mediocre rankings. � Recent initiatives include hiring a new COO in November 2011 (George Condos is the former

SVP/Brand Officer at Dunkin Brands and CEO of Friendly’s) who plans to continue Arby’s menu simplification process while also focusing on improvements in service, accuracy and quality.

Initiatives/

Equipment

� In an effort to revitalize Arby’s menu, the company hired an outside firm (Mattson) in October 2011. � New training programs are being utilized to improve service with a particular focus on guest

friendliness and greetings. As an example, all restaurant teams received new training as part of the “Good Mood Food” campaign roll-out in early 2011.

� Ongoing company initiatives designed to improve store level operations and customer service include: (1) Red Hat Service, (2) Promise Check, and (3) Safety First. The Red Hat Service program seeks to improve hospitality by hiring friendly people while rewarding staff for high hospitality measurement scores. Promise Check seeks to gather direct customer feedback in a timely and actionable format (via its Mindshare customer feedback program) to make sure Arby’s is meeting their expectations. Safety First consolidates all of the chain’s safety programs into a single computer based module, making it easier for employees to access.

Quality

Control

� Every Arby’s restaurant receives 1 to 2 comprehensive unannounced store evaluations per year (with more frequent evaluations for failing stores) by a company Franchise Business Manager. FBMs also provide a variety of on-site consulting services to franchisees.

� Customer feedback is gathered through its Mindshare program (designed to drive more timely identification and resolution of customer issues) which provides an 800 number call-in/online www.arbys.com/survey on the back of receipts. This program reportedly generates approximately 50-100 responses per store per month and is optional for franchisees.

Customer

Ratings

� Based on independent third party customer satisfaction studies, Arby’s ranks in the mid to low end of its peers.

� Arby’s did not earn any top 5 rankings in Zagat’s 2011 QSR survey. � According to the 2011 Market Force Information Survey, Arby’s had a 5/11 rating (favorite chain). � NRN/WD Partner’s 2011 Consumer Picks Survey indicates an average ranking for Arby’s with a better

showing in the food quality, service and cleanliness categories but a lower rating in value.

(1 best – 32) Quality Value Cleanliness Service Variety Reputation Atmosphere Recommend Return

Arby’s 15th/32 13 21 14 13 19 17 17 18 16

# Top 5 Ratings

# Companies per Study 32 29 28 4 8 11 7 Out of 19 Categories

Arby's 15 23 22 5 0

Brand

Keys

Market

Force

QSR Drive-

thru

Customer Survey Index Summary - Sandwich (1 Best - Relative to Segment)

ZagatConceptNRN Consumer

Picks

Consumer

Reports

JD

PowersACSI



5. Unit Economics

� While Arby’s unit level sales volumes appear to have bottomed in 2010, unit profitability remains under pressure due to rising commodity costs.

� Arby’s estimated FYE 2011 AUV has recovered almost one third of the losses that occurred over the 2008 – 2010 period but is still approximately 13% below the 2007 peak ($900k versus $1.04 million).

� We estimate food & paper costs have increased about 100 bps in 2011 to 29.0% which has more than off-set a modest 50 bps improvement in labor due to the sales leverage – resulting in an approximate 75 basis point decline in EBITDAR to 17.25% (its lowest level in at least 5 years).

� Notably, there is also a significant AUV differential between the more modern Pinnacle/Pinnacle Modified stores which represent 51% of the system (depicted in the unit economic data below), older store formats (40% of units) and non-traditional (9% of units). As of FYE 2010, Pinnacle stores generated an estimated AUV of $866k compared to non-traditional and older store formats which generated an AUV of about $759k.

$1,040,000$990,000

$918,000$866,000 $900,000

19.0%20.0%

18.0% 18.0% 17.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

2007 2008 2009 2010 2011

Arby's Franchisee AUV & EBITDAR Trends

Arby's AUV Sandwich AUV Arby's EBITDAR % Sandwich EBITDAR %

AU

V

EB

ITD

AR

%

2007 2008 2009 2010 2011

As of Date Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

AUV $1,040,000 $990,000 $918,000 $866,000 $900,000

Food & Paper 30.0% 29.0% 28.0% 28.0% 29.0%

Labor & Benefits 28.5% 29.8% 31.5% 31.0% 30.5%

EBITDAR (Pre G&A) 19.0% 20.0% 18.0% 18.0% 17.3%

Sandwich SegmentAUV $1,090,273 $1,112,241 $1,099,291 $1,083,965 $1,098,196

Food & Paper 29.5% 30.1% 29.0% 29.3% 29.6%

Labor & Benefits 27.9% 28.0% 28.3% 28.5% 28.5%

EBITDAR (Pre G&A) 21.4% 20.1% 20.6% 19.9% 19.6%

Estimated Franchisee Unit Economic History

Arby's



6. Unit Growth

New Unit Development

Growth

Plans

� New unit development has been sharply curtailed over the last three years in order to focus on improving sales and profitability at existing stores. Arby’s longer-term development prospects suffer from a low sales to investment ratio.

� All-the-same, the company continues to offer several development incentives including: (1) the Development Incentive Program “DIP” and (2) Proximity Incentive Program "PIP".

� The DIP runs from 4/1/11 – 3/31/13 and seeks to increase Arby’s penetration in existing markets by offering a reduced initial fee of $27.5k for the first unit and $15k for each subsequent unit plus a reduced royalty rate of 2% during the first 24 months and then the standard 4% fee for the balance of the term.

� The PIP (since 2007) encourages existing franchisees to build a new store within 2.5 miles of their existing traditional stores by offering a reduced royalty (1%, 2%, 3% and 4% in yr. 4 and beyond) and no initial fee.

Target

Markets

� According to Arby’s website, there is the potential to develop 200+ new restaurants in California, Texas, Florida and New York, 100 to 200 new stores in Illinois, Pennsylvania, New Jersey and Massachusetts with more limited expansion opportunities in the western half of the country.

� Trade area targets include daily traffic of 20k+, population of 20k+, daytime employees of 6k, household income of $45k and close proximity to other QSR restaurants.

Closures � Arby’s steadily rising closures reflect ongoing concept weakness hastened by declining sales and profits over the last 3 years. We anticipate further closures and system contraction given that: (1) approximately 450 Arby’s franchised restaurants (representing about 20% of franchised units as of 4/3/11) were at least 60 days past due on their franchise fees and rent, and (2) a significant amount of franchise stores that are coming up for renewal within the next few years may not get renewed considering the current state of the brand and expensive remodel requirements. However, closures of these units could be moderated by a continued improvement in sales and a more sustainable turnaround.

Source: RR

3.9% 4.2%3.4%

1.5%

0.8% 0.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2006 2007 2008 2009 2010 2011E

Arby's Gross New Unit Growth vs. $1B+ Sandwich Chain Average

Arby's Sandwich

1.4%1.2%

1.5%

2.7% 2.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2006 2007 2008 2009 2010

Arby's Transfer & Closure Rates vs. $1B+ Sandwich Chain Average

Arby's Closures Sandwich Closures Arby's Franchise Transfers



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Arby's %

State Total Franchised Company Total 2006 2007 2008 2009 2010 2011E 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

Alabama 102 32 70 2.9% 0 6 3 1 1 0 0 0 0 1 2 0 6 3 0 (1) 0 0 0 0 10

Alaska 9 9 0 0.3% 0 0 0 0 0 0 0 1 1 0 0 0 (1) (1) 0 0 0 0 0 0 0

Arizona 83 83 0 2.4% 2 2 5 1 1 0 0 0 2 1 1 2 2 3 0 0 0 2 2 0 0

Arkansas 44 44 0 1.3% 5 1 1 0 2 0 2 0 1 0 2 3 1 0 0 0 0 0 0 0 0

California 120 92 28 3.4% 5 0 4 4 0 0 5 5 4 9 8 0 (5) 0 (5) (8) 8 5 2 6 2

Colorado 61 61 0 1.7% 1 0 0 0 0 0 0 1 3 1 1 1 (1) (3) (1) (1) 0 0 0 10 0

Connecticut 14 2 12 0.4% 2 3 2 0 0 0 2 0 2 0 0 0 3 0 0 0 1 0 0 0 0

Delaware 17 17 0 0.5% 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 (2) 1 0 0 0 0District Of Columbia 0 0 0 0.0% 0 0 0 0 0 0 0 1 0 0 0 0 (1) 0 0 0 0 0 0 0 0

Florida 169 79 90 4.8% 10 5 9 3 1 0 2 4 2 9 9 8 1 7 (6) (8) 30 1 3 0 15

Georgia 146 54 92 4.2% 6 4 3 1 1 1 4 5 4 5 2 2 (1) (1) (4) (1) 1 2 3 0 0

Hawaii 9 9 0 0.3% 0 1 0 1 1 0 0 0 0 0 0 0 1 0 1 1 0 0 0 0 0

Idaho 21 21 0 0.6% 1 1 0 0 0 0 0 0 0 0 1 1 1 0 0 (1) 0 0 0 0 0

Illinois 130 125 5 3.7% 4 6 7 1 0 1 4 2 4 8 14 0 4 3 (7) (14) 2 1 0 0 1

Indiana 179 80 99 5.1% 1 7 1 1 0 1 1 1 1 0 3 0 6 0 1 (3) 2 0 8 5 1

Iowa 54 54 0 1.5% 4 3 0 2 0 0 0 0 1 0 0 4 3 (1) 2 0 0 0 0 0 1

Kansas 52 52 0 1.5% 3 3 2 1 1 1 0 0 1 0 0 3 3 1 1 1 0 0 0 0 0

Kentucky 132 84 48 3.8% 6 8 3 1 0 1 1 0 0 4 1 5 8 3 (3) (1) 0 4 8 2 1

Louisiana 27 27 0 0.8% 1 3 1 1 1 0 0 1 0 2 4 1 2 1 (1) (3) 1 1 2 0 0

Maine 8 8 0 0.2% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 1 0

Maryland 48 31 17 1.4% 3 3 5 1 2 1 1 3 0 0 1 2 0 5 1 1 0 0 0 0 0

Massachusetts 5 5 0 0.1% 0 0 0 0 0 0 0 0 0 1 0 0 0 0 (1) 0 0 0 0 1 0

Michigan 185 78 107 5.3% 9 7 1 0 0 1 2 2 4 4 4 7 5 (3) (4) (4) 4 2 10 4 4

Minnesota 85 2 83 2.4% 5 6 5 2 0 0 0 0 2 2 1 5 6 3 0 (1) 0 0 0 0 0

Mississippi 23 20 3 0.7% 0 1 4 1 0 1 0 0 0 2 1 0 1 4 (1) (1) 1 2 0 0 7

Missouri 85 81 4 2.4% 5 6 9 2 4 2 0 0 2 0 1 5 6 7 2 3 2 0 0 1 0

Montana 19 19 0 0.5% 0 1 0 0 1 0 0 1 0 0 0 0 0 0 0 1 0 0 0 0 0

Nebraska 50 50 0 1.4% 1 1 1 0 0 0 0 0 0 0 0 1 1 1 0 0 0 0 0 0 0

Nevada 30 30 0 0.9% 2 0 0 0 0 0 0 0 0 4 1 2 0 0 (4) (1) 1 0 0 1 2

New Hampshire 0 0 0 0.0% 0 0 0 0 0 0 0 0 0 1 0 0 0 0 (1) 0 0 0 0 0 0

New Jersey 27 10 17 0.8% 2 2 3 2 1 0 0 0 1 3 1 2 2 2 (1) 0 0 2 1 1 1

New Mexico 30 30 0 0.9% 1 1 1 0 0 0 2 0 0 1 0 (1) 1 1 (1) 0 0 0 1 0 0

New York 84 84 0 2.4% 5 4 2 1 1 1 1 2 6 3 4 4 2 (4) (2) (3) 0 1 7 0 0

North Carolina 138 78 60 3.9% 7 10 5 0 0 0 5 0 1 3 1 2 10 4 (3) (1) 4 47 1 34 0

North Dakota 14 14 0 0.4% 1 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0

Ohio 279 177 102 7.9% 8 6 2 1 1 1 5 4 2 6 7 3 2 0 (5) (6) 0 8 1 1 2

Oklahoma 95 95 0 2.7% 1 1 0 2 0 1 0 2 0 2 0 1 (1) 0 0 0 0 0 0 0 0

Oregon 37 16 21 1.1% 0 1 2 0 0 0 0 1 2 2 0 0 0 0 (2) 0 0 0 0 0 0

Pennsylvania 145 57 88 4.1% 5 3 2 3 0 0 3 2 0 4 6 2 1 2 (1) (6) 0 11 1 1 0

Rhode Island 0 0 0 0.0% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

South Carolina 77 64 13 2.2% 4 3 3 3 4 0 0 0 1 0 1 4 3 2 3 3 0 0 4 0 0

South Dakota 15 15 0 0.4% 0 2 1 0 0 1 1 0 0 0 0 (1) 2 1 0 0 0 0 0 1 0

Tennessee 109 57 52 3.1% 3 3 3 3 0 0 0 2 1 2 3 3 1 2 1 (3) 0 0 0 0 1

Texas 170 102 68 4.8% 5 17 15 8 3 1 4 6 2 7 14 1 11 13 1 (11) 10 10 0 4 0

Utah 68 35 33 1.9% 1 1 1 3 0 1 0 0 0 1 5 1 1 1 2 (5) 0 1 2 14 3

Vermont 0 0 0 0.0% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Virginia 109 107 2 3.1% 5 7 5 0 1 1 1 1 1 1 1 4 6 4 (1) 0 1 4 1 0 0

Washington 64 40 24 1.8% 0 1 1 1 0 0 1 0 1 1 1 (1) 1 0 0 (1) 0 1 1 0 3

West Virginia 36 35 1 1.0% 1 1 3 1 0 1 0 0 0 0 0 1 1 3 1 0 0 0 0 0 0

Wisconsin 91 87 4 2.6% 6 4 5 2 2 0 0 0 1 2 1 6 4 4 0 1 1 0 0 5 0

Wyoming 16 15 1 0.5% 1 1 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 0 0 0

Total 3,511 2,367 1,144 100.0% 132 146 120 54 29 18 48 47 53 92 104 84 99 67 (38) (75) 71 105 58 92 54

% YOY Growth -2.1% -2.1% -2.1% 3.9% 4.2% 3.4% 1.5% 0.8% 0.5% 1.4% 1.4% 1.5% 2.5% 2.9% 2.5% 2.9% 1.9% -1.0% -2.1% 3.0% 4.4% 2.4% 3.8% 2.2%

Please note state unit data is derived from FDDs and may vary from figures reported in 10-ks and annual reports.

Unit Activity by State

Gross New Unit Openings Unit Closings Net Unit Openings Transfers Between Franchisees2010 Unit Count



New Build vs. Buy Analysis

Building

Efficiency

� Arby’s low AUV and relatively large footprint negatively impact its sales to investment ratio. However, Arby’s management team continues to seek ways to reduce construction costs for new stores including a smaller building with reduced seating capacity. Some franchisees would also like to see an in-line option which could also help to improve the new build ROI.

� Currently, the Arby’s system utilizes 4 building designs: (1) Pinnacle, (2) Pinnacle Modified, (3) a Convenience Store option, and (4) non-traditional (colleges, airports, retail centers).

� Pinnacle restaurants feature a prominent diamond-shaped two-story window that extends above the roofline of the building while the Pinnacle Modified incorporates a pinnacle shaped window in the roof line.

� Typical new building parameters include a ½ to ¾ acre lot with a 1:2 parking/seating ratio and freestanding building size of 2,133 – 3,015 sq. ft. with a drive-thru.

Valuation � Arby’s estimated franchise EBITDA multiple has been steadily declining since 2007 and is currently about 10% below the segment average which reflects concept weakness and a sizeable supply of distressed stores.

Build vs. Buy � New build costs run approximately 30% more than a hypothetical acquisition.

Source: January 2012 RR Valuation Survey

Estimated Concept Business Valuations (EBITDA Multiple)

Average Estimated Multiple % Change 2012 Absolute Range

Concept Jul ‘10 Jan ‘11 Jul ‘11 Jan ‘12 Jan‘12/ Jul ’11 Low High Median

Arby’s 4.10 4.03 4.00 3.97 -0.8% 3.75 4.38 4.06

Sandwich 4.32 4.36 4.36 4.42 1.4%

Arby's Sandwich

New build AUV $950,000 $1,157,231

Building & Sitework $600,000 $587,692

Furniture, Equipment & Signage $300,000 $338,769

Small Wares & Inventory $20,000 $17,308

Initial Franchise Fee $37,500 $37,115

Soft Costs (*) $40,000 $51,154

Total $997,500 $1,032,038

Land (sq. ft.) 34,000 33,060

Building size (sq. ft.) 2,800 2,422

# seats 74 56

Sales/sq. ft. $339.29 $477.89

Investment costs/sq. ft. $356.25 $426.19

Sales/investment (excluding land) 0.95 1.12

New Build Cost Overview

New Build Costs (Excluding Land)

Typical New Unit Requirements

Investment Statistics

(*) Soft costs include pre-construction costs such as the initial franchise fee, architectural and engineering fees,

permits, opening advertising, training expenses and utility deposits, but excludes liquor license (if applicable)

due to the extreme range in costs.

vs.

AUV 950,000 AUV 900,000

EBITDA (post G&A) 48,250

Purchase Price Multiple 3.97

Building Costs Ex. Land 997,500 Business Value 191,766

Land 450,000 Land & Building Value (Rent/Cap Rate) 923,077

Total New Build Investment 1,447,500 Total Acquisition Costs 1,114,843

Annual Land & Building Rent % 8.0% Cap Rate 7.8%

G&A per Unit 35,000 Land Cost 450,000

New Build Investment Costs/Acquistion Costs

New Build vs. Buy Analysis

New Build Acquisition

Arby's

Assumptions

1.30



7. Remodeling Overview

System Physical Condition

Remodel

initiatives � The “Pinnacle” design was introduced in 1996 to update Arby’s restaurants with a lighter, brighter feel.

Pinnacle restaurants feature a prominent diamond-shaped two-story window with the Arby’s hat logo suspended inside that extends above the roofline of the building (the Pinnacle Modified incorporates a pinnacle shaped window within the roofline of the building), a red metal roof and a bold red and subtle tan color scheme which is accented by red illuminated awnings located above each window.

� In order to accelerate remodel progress, the Blade Pinnacle remodel was introduced in 2009. Blade remodels are designed to be a less expensive alternative to a full Pinnacle update and feature the construction of a new façade on an existing building so that it resembles the traditional Pinnacle design using synthetic stucco but without the glass window. The remaining exterior of the building is painted to look new while new signs and red illuminated awnings are installed. Interior elements include a new seating package, front counter, queue line, paint, wall coverings, ADA compliant restrooms and kitchen equipment (including a new slicer counter).

� The company plans to review and update its remodel program in 2012.

Remodel

Costs � The Blade Pinnacle remodel (including the interior and exterior of the building as well as some deferred

maintenance) costs approximately $250k to $300k according to the company. Notably, this represents an approximate $100k to $200k reduction in remodel costs since 2009. A complete scrape & rebuild typically costs around $825k.

� Franchisee remodel estimates run slightly lower at about $200k (excluding any deferred maintenance).

� Franchisees also have the option of a refresher (at a cost of up to $50k) which includes completing all deferred maintenance, required kitchen upgrades, new paint reflecting the current colors, interior décor, upholstery, carpet and upgraded signage in return for a 5 year franchise extension.

Sales Bump � Although limited information has been made available concerning post remodel sales increases, the company has previously targeted a 10% lift for the full remodel.

� Franchisee sales lift estimates range from +5% to +10% for a full remodel but nothing for a refresher.

% updated � From 1996 (the inception of the Pinnacle image) through FYE 2010, about 51% of the system incorporated at least some Pinnacle design elements (including 20% that have been built from the ground up).

Financing � Currently, no financing program is in place. However, the company may provide a partial credit of the $25k renewal fee as an incentive to remodel.

FDD

requirements � Franchisees are obligated to maintain premises in good condition. Upon franchise expiration, franchisees

are required to remodel their stores and the length of the renewal term varies depending on the scope of remodel (from 2 up to a full 20 year term).

“Pinnacle Exterior” “Modified Pinnacle Exterior” “New Interior”



8. Franchisee Overview

Franchisee Sentiment Arby’s franchisee sentiment appears to be slowly recovering from its worst levels set last year as a result of: (1) the recent improvement in sales trends, (2) the company’s separation from Wendy’s in July 2011 and (3) the appointment of several new industry veterans including Hala Moddelmog (Arby’s President and past President of Church’s) in May 2010, George Condos (Arby’s Chief Operating Officer and former Dunkin Brand Officer) in November 2011, Russ Klein (Arby’s Chief Marketing Officer and former Burger King CMO) in January 2012, Jon Luther (Arby’s board member and current chairman of Dunkin Brands) and Sid Feltenstein (Arby’s board member and former chief executive of Yorkshire Global Restaurants). However, some franchisees would like to see a more defined strategic vision for the brand given all the recent management changes. Further, sentiment is sometimes contentious in light of the significant amount of financial strain that operators have endured during 3+ years of sharp sales and profit declines which resulted in approximately 20% of franchised restaurants falling behind on their franchise fees and rent (with some operators closing stores rather than investing in expensive remodels upon franchise renewal or venturing into alternative brands instead of opening new Arby’s because of its low ROI).

Franchisee Profile

Franchising

start date

1965

Number of

franchisees

There are approximately 395 domestic Arby’s franchisees (about 6 stores each on average).

Largest

Franchisees

As of January 2012, Arby’s 10 largest franchisees operated 774 units (about 33% of the franchised system).

Financial

requirements

Currently seeking experienced franchisees with a proven track record in the restaurant industry and the necessary capital (currently $500k in liquid assets) for multi-unit development.

Franchisee

associations AFA Service Corp. (AFA) is responsible for Arby’s marketing and advertising strategies. Notably, Arby’s Restaurant Group (ARG) and the AFA have operated under a management agreement since 2005 in which ARG provides general managerial responsibility for the day to day operations of AFA, and in consultation with the AFA Board, develops the marketing strategy for the Arby’s brand. In addition, the system benefits from ARCOP, Inc., a non-profit cooperative formed in 1978 who’s mission is to contain or reduce costs through consolidated purchasing efficiencies and ensure continuity of supply. Membership in ARCOP is open only to Arby's franchisees and Arby's LLC. The initiation fee for a new franchisee is $100 and the dues are funded through a sourcing fee on a few select items.

Litigation According to Arby’s FDD dated March 2011, there was only one franchise litigation case pending (related to unpaid royalty fees for a terminated franchisee) and 1 concluded international case.

Franchise

Fees:

$37.5k initial unit; $25k for subsequent units (including a $10k per unit development fee). Reduced initial fees ($27.5k first unit and $15k subsequent units) are available as part of Arby’s Development Incentive Program. The initial fee is $12.5k for non-traditional stores. Renewal fees are 10% of the then current initial fee.

Royalty Fees: 4% of gross sales payable monthly (4% - 7% for non-traditional restaurants). A temporary reduced royalty fee is available as part of the Development Incentive and Proximity Incentive Programs.

Largest Arby’s Franchisees

# Units Franchisee # Units Franchisee 1 278 United States Beef Corporation 6 53 The Bailey Company, LLP

2 69 Carisch, Inc 7 53 FX4

3 69 DRM, Inc. 8 45 Lunan Corporation

4 68 Restaurant Management, Inc. 9 44 Love’s Country Stores, Inc.

5 56 Beavers, Inc. 10 39 Pilot Travel Centers, LLC

Source: Company as of January 2012



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Contact Wally Butkus at (203) 405-1901 or [email protected] with questions related to this report.

Copyright: This publication may not be reproduced, retransmitted electronically, including via email, intranet or internet or copied in any form, in whole or part, without prior written permission, whether for internal business use or otherwise. Violators risk criminal penalties and civil damages of up to $150,000 per offense. We vigorously prosecute copyright infringers. Copyright 2012 Restaurant Research® LLC. All rights reserved. Disclaimer of Liability: Although the information in this report has been obtained from sources Restaurant Research® LLC believes to be reliable, RR does not guarantee its accuracy. The views expressed herein are subject to change without notice and in no case can be considered as an offer or solicitation with regard to the purchase or sales of any securities. Restaurant Research’s analyses and opinions are not a guarantee of the future performance of any company or individual franchisee. RR disclaims all liability for any misstatements or omissions that occur in the publication of this report. In making this report available, no client, advisory, fiduciary or professional relationship is implied or established. This report is intended to provide an overview of the restaurant industry, but cannot be used as a substitute for independent investigations and sound business judgment.

arbys january 2012

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