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Five analysts and top management from fourteen sector firms examine the Restaurant Industry sector in this special 91-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info404.htm

TWST: Damon, how would you characterize the performance of the restaurant stocks in 2001 year-to-date?

Mr. Brundage: Most casual dining stocks have, until the last month or two, performed fairly well. The QSR (quick service restaurant) area has been more of a mixed bag; McDonald’s (NYSE:MCD) has had a difficult year but TRICON (NYSE:YUM) and Wendy’s (NYSE:WEN) have performed well.

TWST: What has been driving the performance of the casual dining stocks?

Mr. Brundage: Investors, in my opinion, have been using a lot of these names as safe havens. With the collapse in the technology sector, investors have focused on companies with somewhat more stable business models. One portfolio manager with whom I spoke recently and who has largely agreed with our cautious stance on casual dining, but who still owns a fair number of casual dining stocks, summed it up this way: “I don’t mind if a casual dining stock misses its numbers by a penny or two since I’ve recently owned stuff that has missed by a buck.” The theory has been that even if the economy does slow a bit, people are still going to continue to eat out. And until recently, the same-store sales growth numbers generally have been strong. However, during the last month or two, comps have begun to weaken across the sector.

TWST: What are some of the new products that McDonald’s has introduced in North America, as well as overseas?

Mr. Brundage: They have a new pork sandwich in Germany, a ham and cheese croissant in France, and a couple of new chicken items in the UK. Domestically, the emphasis has been on the new taste menu; they’ll be featuring an array of products, not necessarily new products, but products that they have used from time to time that, for whatever reason, didn’t become part of the permanent menu. This will include everything from burgers to chicken sandwiches to dessert items and so forth — anything to entice people to give their local McDonald’s a try. But candidly, it’s pretty obvious that the made-for-you rollout has not had a major impact on US sales. And I don’t think any of the new products rolled out in conjunction with made-for-you have really moved the needle much either. So we’re not expecting a whole lot of growth from McDonald’s US business the next year. We do not, however, think things are going to fall off a cliff domestically either; rather, McDonald’s is in a muddle through mode now where US profits should grow 1%-4% during the next six to 12 months.

TWST: Has there been a summer movie tie-in this year?

Mr. Brundage: To the best of my knowledge there has not been.

TWST: Is that unusual for McDonald’s?

Mr. Brundage: The company is trying to move away from merchandise-based promotions and more toward product-based marketing. Trying to entice people with a toy or with a movie tie-in has been de-emphasized during the last year or so.

TWST: Again, is there one specific risk, or a couple of specific risks that investors should at least have in the back of their minds?

Mr. Brundage: We tend to view McDonald’s almost as a win-win situation.

TWST: There aren’t many of those.

Mr. Brundage: No, there aren’t. The biggest risk is that international doesn’t turn, and that’s certainly possible, given that the global economic growth appears to be decelerating. So maybe we don’t get the kind of uptick in international sales in the fourth quarter that we’re hoping for, but if that does not occur, then the pressure for McDonald’s to scale back international unit growth is going to be intense and I expect management will finally have to yield to this pressure. And if McDonald’s did reduce international unit openings from 1,300 stores this year to 800-900 next year, it could spark a rally in the stock.

This special conference issue includes:

1) Restaurant Industry - In an in-depth (13,000 words) Analyst Roundtable, Andrew Barish, Managing Director at Banc of America Securities, Joseph Buckley, Senior Managing Director at Bear, Stearns & Company, Mark Kalinowski, Vice President at Salomon Smith Barney and Janice Meyer, Managing Director at Credit Suisse First Boston, examine the outlook for the sector including, economic outlook, new restaurant concepts and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at nineteen sector firms asked market insiders about the ability of management teams to create shareholder value.

3) Restaurant Stocks - In an in-depth (3,500 words) Analyst Interview, Damon Brundage, Vice President of Equity Research at Raymond James & Associates examines the outlook for the sector and shares specific stock recommendations.

4) CEO and Sponsored interviews (average 2,500 words). Top management of fourteen sector firms examine the outlook for their firm and the sector.