DPZ - Domino's Pizza

[hasilp89]

thank you both for the thoughts.

[KCLarkin]

thank you both for the thoughts.

 

I just ran some quick numbers (skipping a few small line items).

 

Over the past five years:

 

FCF more than doubled.

TSR (Dividend + Buybacks) = $3.4B

TSR = 200% of FCF

 

Starting market cap was ~$5.5 B, so they returned 60% of original market cap and still doubled FCF. Alchemy.

 

[coc]

How many units are they hoping to attain?

[KCLarkin]

25,000 stores by 2025 vs 17,000 in 2019.

[DooDiligence]

If I was made to choose only one food that I'd have to eat every day for the rest of my life, I'd pick a Dominoes thin with pepperoni, sausage & bacon. Thanks for reminding me about the business behind the pizza.

 

This Tweet storm really doesn't add much, but it's great turnaround porn.

 

[hasilp89]

If I was made to choose only one food that I'd have to eat every day for the rest of my life, I'd pick a Dominoes thin with pepperoni, sausage & bacon. Thanks for reminding me about the business behind the pizza.

 

This Tweet storm really doesn't add much, but it's great turnaround porn.

 

 

Lol the pizza really isn’t that bad. Saw that tweet. Getting the product right was the start but their focus on profitability for franchisees / distribution / technology is what gets and keeps the virtuous cycle going. Everything else works wonders after that.

 

“The best business is a royalty on the growth of others, requiring little capital itself.” – Warren Buffett

 

[DooDiligence]

Promoting from within, kind of.

 

"more than 90 percent of franchise owners come from within the company, having managed or supervised stores before owning their own."

 

www.mashed.com/208193/how-much-dominos-pizza-franchise-owners-really-make-per-year/?utm_campaign=clip

 

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I really like the business & the turnaround has been miraculous.

 

I hear some haters out there (pizza snobs / posers). I remember, way back, when their pizza actually did suck, before the transformation.

 

You can go to a locally owned parlor & spend nearly $40 for 2 people on an ok pizza, or drive less than 5 minutes to pick up a large 3 topping for $7.99, and dip into the Winn Dixie next door for some wine coolers & beer (less than $20) & still have $$$ left over to pay the NetFlix monthly, and have lunch for the next day + a few drinks left over for another at home date.

 

This is a 4.4% position for me & I'd be ok adding more on a bigger dip.

 

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Additional reading:

 

https://medium.com/edison-discovers/dominos-takes-50-of-pizza-delivery-market-leading-pizza-hut-29-and-papa-johns-21-6f8c11ef03a3

 

https://www.qsrmagazine.com/fast-food/third-party-delivery-looks-answers-dominos-good-spot

 

 

more light reading on the industry and competitors in general

 

www.qsrmagazine.com/pizza

 

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Push back on this idea?

[Longtermlens]

Looking at adding here @ 13 billion market cap I think it looks attractive.

 

Really like the way Young Hamilton Blog breaks the business down. If you have not read it, would encourage you to do so.

 

https://yhamiltonblog.substack.com/p/agb-202011-dominos-pizza-dpz

[KCLarkin]

https://www.joincolossus.com/episodes/93129089/fuss-breaking-down-the-food-ecosystem

 

Patrick O’Shaugnessey did a podcast with a very interesting perspective on DPZ. I highly recommend the whole episode but the segment on DPZ was gold.

 

Like many of the greatest businesses, DPZ creates tremendous value for key stakeholders. Customers, franchisees, drivers. Despite taking only a small sliver of the value created, DPZ earns 100% ROIC.

 

[Longtermlens]

For those who have commented - how are you guys thinking about valuation here?

 

Very simply - assuming shares trade somewhere between 25 and 33 times earnings - think its fair investors can expect in the ballpark of 10% returns.

 

Also will be interesting to see what happens with China. 300 stores currently with the plan to get to 1000 by 2025.

[LC]

Any concerns they previously pulled forward shareholder returns and are now seeing a return to the mean:

 

The company has recognized this and has historically kept its cash balance low. Over the past 10 years, Domino’s has generated $2.7B in operating cash flow. During this time period, the company has paid $700M in dividends and $3.8B in buybacks mainly funded from a series of recapitalization transactions. The company has increased its debt balance by $2.7B (from $1.45 to $4.1B) to fund its share repurchases, the majority of which have been completed after FY14.

 

[KCLarkin]

Any concerns they previously pulled forward shareholder returns and are now seeing a return to the mean:

 

The company has PE roots and will continue to increase debt. If they double EBITDA over the next 5 years, I'd expect them to also double debt. As long as they are growing, I expect them to spend >100% of FCF on buybacks+dividnds. I'm expecting another recapitalization in the next 12 to 24 months.

 

One's comfort level with these aggressive leveraged recaps obviously depends on how much faith you have in the company and management. I'm okay with it since the rest of my portfolio has very little debt.

[KCLarkin]

Very simply - assuming shares trade somewhere between 25 and 33 times earnings - think its fair investors can expect in the ballpark of 10% returns.

 

Barring a major market sell-off, I struggle to see how you can get less than 10% from current price.

 

Simple math:

Shareholder yield: 4-5%

Revenue growth: 6-10%

Operating leverage: ?

 

Pretty clear path to at least 10-15% EPS growth over the next few years.

 

Unfortunately this is already a 10% position, so I am unwilling to add unless it drops further.

 

 

[kab60]

How far out would you be comfortable underwriting 6-10 pct. revenue growth?

 

It's a fabolous business, but quiet a bit of the return has obviously been driven by multiple expansion. It's probably warranted as the Company has improved and gained increased scale, but we're at 20xfwd ev/ebitda (traded at 25 mid 2018 and mid 2020).

 

I really like how it creates value for all stakeholders. And I love how it seems to be the low cost pizza provider. People will always want a good deal, and pizza doesn't seem to be going anywhere either. Whereas some of the more premium offerings will probably have to keep innovating and fighting with local "artisan" offerings.

[KCLarkin]

How far out would you be comfortable underwriting 6-10 pct. revenue growth?

 

It's a fabolous business, but quiet a bit of the return has obviously been driven by multiple expansion. It's probably warranted as the Company has improved and gained increased scale, but we're at 20xfwd ev/ebitda (traded at 25 mid 2018 and mid 2020).

 

I really like how it creates value for all stakeholders. And I love how it seems to be the low cost pizza provider. People will always want a good deal, and pizza doesn't seem to be going anywhere either. Whereas some of the more premium offerings will probably have to keep innovating and fighting with local "artisan" offerings.

 

There is plenty of nuance in your questions, so I will just pick a few:

- Multiple expansion: DPZ was crazy cheap from 2009-2013. Since 2014, most of the returns were driven by fundamentals. 26% eps growth + dividend.

- EV/EBITDA: Even absent growth, a capital light, high ROIC business warrants a premium. But DPZ is less attractive on EV/EBITDA. On good days, most investors will ignore the debt so free cash flow is more relevant right now. But the valuation downside is limited. What is a fair multiple for one of the highest ROIC businesses in the world, even absent growth? Maybe 15x.  Taxes dropped significantly in 2018, so higher EBITDA multiples are justified relative to pre-2018.

 

Regarding the 6-10% growth, I'm only looking out three years. In the short term, growth will be driven mostly by new restaurants. In a few years, SSS will regain importance as the company laps Covid. But a simpler question: is DPZ's competitive position increasing or decreasing or stagnating? It is increasing, so I'm expecting sustainable market share gains for the next several years. Div+BB+Market Share+Operating leverage should give good to great returns even if shares rerate.

 

[coc]

But a simpler question: is DPZ's competitive position increasing or decreasing or stagnating? It is increasing, so I'm expecting sustainable market share gains for the next several years.

 

Can I ask what makes you say that? Not disagreeing - I am just beginning to study DPZ. Thanks.

[kab60]

But a simpler question: is DPZ's competitive position increasing or decreasing or stagnating? It is increasing, so I'm expecting sustainable market share gains for the next several years.

 

Can I ask what makes you say that? Not disagreeing - I am just beginning to study DPZ. Thanks.

I suppose it is because they're taking market share. Quiet a bit actuslly. Very interesting company, thanks KC.

[hasilp89]

But a simpler question: is DPZ's competitive position increasing or decreasing or stagnating? It is increasing, so I'm expecting sustainable market share gains for the next several years.

 

Can I ask what makes you say that? Not disagreeing - I am just beginning to study DPZ. Thanks.

I suppose it is because they're taking market share. Quiet a bit actuslly. Very interesting company, thanks KC.

 

Quality of pizza and how it resonates with consumers has been discussed at length - it is evident from the market share numbers discussed.

 

What I think has driven virtuous cycle here to a place where competitors may never reach is evident from looking at DPZ's true customers the franchisors. If you had the choice you would franchise a dominos or another Pizza QSR. I'd assume most folks would choose DPZ over any other Pizza QSR and even over any other QSR aside from a Chic Fil A.

-The brand is resilient, strong and growing

- ROI is the highest and most sustainable in the industry (again aside from maybe chic fil a)

- the brand support and innovation is the best in the industry. (eg. You're not worrying about cheese and flour prices - DPZ's distro business is supplying you at the best possible cost) 

 

For anyone interested take a look at the success Alsea has had in Mexico with NUG growth over the years. Similar stories in Australia, England and India. They've had speed bumps from time to time, but these guys showed up as $250m of revenue in 2020 that is extremely high margin. China is next.

 

 

[Longtermlens]

But a simpler question: is DPZ's competitive position increasing or decreasing or stagnating? It is increasing, so I'm expecting sustainable market share gains for the next several years.

 

Can I ask what makes you say that? Not disagreeing - I am just beginning to study DPZ. Thanks.

I suppose it is because they're taking market share. Quiet a bit actuslly. Very interesting company, thanks KC.

 

Quality of pizza and how it resonates with consumers has been discussed at length - it is evident from the market share numbers discussed.

 

What I think has driven virtuous cycle here to a place where competitors may never reach is evident from looking at DPZ's true customers the franchisors. If you had the choice you would franchise a dominos or another Pizza QSR. I'd assume most folks would choose DPZ over any other Pizza QSR and even over any other QSR aside from a Chic Fil A.

-The brand is resilient, strong and growing

- ROI is the highest and most sustainable in the industry (again aside from maybe chic fil a)

- the brand support and innovation is the best in the industry. (eg. You're not worrying about cheese and flour prices - DPZ's distro business is supplying you at the best possible cost) 

 

For anyone interested take a look at the success Alsea has had in Mexico with NUG growth over the years. Similar stories in Australia, England and India. They've had speed bumps from time to time, but these guys showed up as $250m of revenue in 2020 that is extremely high margin. China is next.

 

+1

as KCLARKIN mentioned, the Patrick O’Shaugnesse podcast goes into this some. cost of buildout = 350k. sales = $1MM cash flow = around 100k a year. Around a 30% cash on cash return for the franchisor. Think he even states from his research, that this is better than chick fil a. Only thing that competes from a cash on cash point of view is a wingstop.

[hasilp89]

But a simpler question: is DPZ's competitive position increasing or decreasing or stagnating? It is increasing, so I'm expecting sustainable market share gains for the next several years.

 

Can I ask what makes you say that? Not disagreeing - I am just beginning to study DPZ. Thanks.

I suppose it is because they're taking market share. Quiet a bit actuslly. Very interesting company, thanks KC.

 

Quality of pizza and how it resonates with consumers has been discussed at length - it is evident from the market share numbers discussed.

 

What I think has driven virtuous cycle here to a place where competitors may never reach is evident from looking at DPZ's true customers the franchisors. If you had the choice you would franchise a dominos or another Pizza QSR. I'd assume most folks would choose DPZ over any other Pizza QSR and even over any other QSR aside from a Chic Fil A.

-The brand is resilient, strong and growing

- ROI is the highest and most sustainable in the industry (again aside from maybe chic fil a)

- the brand support and innovation is the best in the industry. (eg. You're not worrying about cheese and flour prices - DPZ's distro business is supplying you at the best possible cost) 

 

For anyone interested take a look at the success Alsea has had in Mexico with NUG growth over the years. Similar stories in Australia, England and India. They've had speed bumps from time to time, but these guys showed up as $250m of revenue in 2020 that is extremely high margin. China is next.

 

+1

as KCLARKIN mentioned, the Patrick O’Shaugnesse podcast goes into this some. cost of buildout = 350k. sales = $1MM cash flow = around 100k a year. Around a 30% cash on cash return for the franchisor. Think he even states from his research, that this is better than chick fil a. Only thing that competes from a cash on cash point of view is a wingstop.

 

Just listened to that podcast. It was an excellent summary.

[DooDiligence]

https://www.joincolossus.com/episodes/93129089/fuss-breaking-down-the-food-ecosystem

 

Patrick O’Shaugnessey did a podcast with a very interesting perspective on DPZ. I highly recommend the whole episode but the segment on DPZ was gold.

 

Like many of the greatest businesses, DPZ creates tremendous value for key stakeholders. Customers, franchisees, drivers. Despite taking only a small sliver of the value created, DPZ earns 100% ROIC.

 

+1

 

Thanks

[KCLarkin]

But a simpler question: is DPZ's competitive position increasing or decreasing or stagnating? It is increasing, so I'm expecting sustainable market share gains for the next several years.

 

Can I ask what makes you say that? Not disagreeing - I am just beginning to study DPZ. Thanks.

 

They have a winning strategy and they are executing ruthlessly. It reminds me of the Jeff Bezos' strategy:

 

"You can build a business strategy around the things that are stable in time. … In our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”

 

What do customers want in delivery pizza? Good, hot, cheap pizza, ordered easily, and delivered quickly. Domino's put that effort in over the last 10+ years. Some people try to explain Domino's success because they are a "tech company" or the "tastes like cardboard" turnaround campaign. Those were important, but alone they would only give a temporary boost. They put energy into all the things most important to customers (and franchisees). And they stole market share and built a dominant competitive position. This strategy was built over 10+ years, so it will be durable.

 

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From the Zack Fuss Invest with the best episode:

It's almost like a system engineer's dream in the way that these businesses that work. And then the question is, okay, how are they driving same-store sales to their stores? So for a medium, large, two-topping pizza, they've charged 7.99 for as long as I can remember. And so as they gain incremental scale, they have the benefit of passing that scale economics onto their customer. There is this really interesting kind of feedback loop in their businesses where they invest more in the stores, it drives higher same-store sales. Because they have higher same-store sales, the stores are more profitable. Because some stores are more profitable, the franchisees are willing to open up more stores. And because the franchisees are willing to open up more stores in their designated region, that means that delivery times are going to be lower. And if delivery times are lower, that means that the customers are going to be more satisfied and order more pizza. And on and on and on you go. And they've actually formalized that strategy to something called fortressing.

 

[kab60]

That growth algorithm of new stores, SSS and share buybacks is very interesting. More so for a royalty business like Dominos, which can handle high levels of leverage, so that a 1m increase in ebitda is matched by 5m in debt capacity, which can be used for buybacks.

 

A starting fwd FCF yield of 3,6 pct. is not usually my cup of tea, but being the low cost pizza provider does seem intriguing.

 

What are the visible signs of their cost advantage vs peers? Combination of higher margins and cheaper pizza? And does the cost advantage mostly come down to distribution (dense network), or are their visible signs of cheaper procurement as well (flour, cheese etc.)? Because with all the money being sloshed at stuff like DoorDash and UberEats, it seems you're competing with folks that gets subsidized delivery from public equity investors.

 

Either way, I'll have to do some scuttlebutt due diligence tonight and order my first Dominos pizza. I wasn't actually sure if it was still around here, as the Danish franchisee went BK a couple of years ago after revelations of tampering with the dates of their ingredients and bad hygiene.

 

It also doesn't seem cheaper than the local players, but they also have only 24 stores, so perhaps they just lack scale and density, which is obviously hard to fix with a bad reputation. They really should run a "Our Pizza Sucked"-campaign here, because that's still the perception, I think.

[Spekulatius]

The delivery advantage due to density would be one competitive advantage I would be concerned about, because the delivery players like UeberEats etc are not going away, Those guys play the scaling game too and when you  look at Uebers  presentation, it‘s all about route density.

 

So in that way, the Domino‘s delivery advantage is going to diminish. Pickup is interesting and I think here they could have an edge, as they do a superb job with their app to make this easy and transparent for the customer.

I had Domino‘s pizza only once and that was during the pandemic when I picked on up on my way home from work and the ordering process was very well done (contactless pickup). The pizza itself is nothing to rave about, but it’s not cardboard either.

[clutch]

I love Domino's, both their ordering experience and pizza. I guess I'm a minority here who actually eat their pizza regularly.

 

But it's hard to project the future with any food business unfortunately. Not sure if their business justifies the current multiples.

 

Aside: here in Toronto, there is now pizza subscription service offered by a local shop. They were able to raise $13m:

https://torontosun.com/news/local-news/general-assembly-pizza-gets-13m-to-give-rise-to-subscription-service

 

I wonder if Domino's is thinking something like this. I don't know if Pizza As a Service would be the thing going forward but just having the word "subscription" attached to their business the share price might explode.