Domino’s Pizza - DPZ (Buy)
One stock I’ve had my eye on for a while is Domino’s Pizza. The franchise has grown in popularity over the years, and after an aggressive rebranding in 2009, they have quickly become the biggest pizza chain in the world.
Domino’s Pizza had their quarterly report already, it was last week, which gives us the perfect amount of time to let the earnings cool off and have a slice of the data ourselves.
Before we dive into the facts and figures. I found some interesting facts while doing some research into Domino’s Pizza, and there don’t fit anywhere else. Here are some interesting facts for you to munch on.
- Domino’s stores across the globe sell an average of 3 million pizzas a day.
- Domino’s operates 17,000 stores in more than 90 countries around the world (Q1 2020).
- Domino’s estimates that it has more than 350,000 franchised and corporate team members worldwide .
More than half of Domino’s sales now come from outside the U.S. (2019 global retail sales: $14.3 billion of which, $7 domestic, $7.3 international).
- Domino’s International has experienced 105 consecutive quarters of positive same-store sales growth (Q1 2020).
- In the U.S., Domino’s generates more than 65% of sales via digital ordering channels.
Interesting to see their strength digitally, but also their success overseas outside their dominate home market. But let’s look at the historic share price.
From Google Finance
What should be catching your eye is that aggressive jump up in Feb. This is when they announced their fourth-quarter earnings for 2019, and beat expectations! They also increased their dividend by 20% off the back of higher profits.
How is Domino’s Pizza expanding so quickly and so successfully? The franchise approach gives them a way to expand their stores with very low upfront costs (the franchise owner pays and also has to source the location) and they take a cut of the revenue as well. How much they take is tricky to find. A lot of franchises do try and hide the figures, and often only the “book cost” percentages are known.
Let’s talk about running a Domino’s Pizza store. Firstly, if you apply to open one of their stores it is likely you will be turned down.
Over 90% of its franchise owners come from being a Domino’s team member first and that “opportunities for external candidates are very limited and are sought only when [the company does] not have an existing franchisee or new internal franchisee who can buy or build the stores in need.”
From Franchise Direct
Assuming you worked at a Domino’s and wanted to open your own, you would need roughly £200k of dough. In return, you would expect to make 8-9% of total sales as take-home profit. £90k as profit for a store owner per year for the bigger stores.
Keep in mind this includes “contributions” towards Domino’s pizza for branding and marketing. Each store is created with either a ten or five-year contract, meaning they aren’t going away anytime soon. Considering most stores will pay off the upfront costs and be paying profits to the owner within that time frame, it’s likely they will renew.
Now we can check out a snapshot of the company and see where its strengths and weakness are as an investment.
From Genuine Impact
This is a classic, high quality, high momentum stock. You have strong financials, there is a lot of a promise for the future, and even with the spike in share price, not massively overpriced compared to the market.
We’ll start with the financial aspects, the quality. The profitability of Domino’s Pizza is not as high as you’d expect. Relative to the rest of the market this isn’t a high-profit business. What is improving the quality rank then? It’s the financial strength and capital allocation. High dividend pays out and low debt makes this a very resilient company.
Speaking of debt, let’s get the figures out of the last report.
$200.8 million of unrestricted cash and cash equivalents;
$4.10 billion in total debt ; and
$158.6 million of available borrowings under its $200.0 million variable funding note facility, net of letters of credit issued of $41.4 million. As previously disclosed, subsequent to the first quarter, the Company borrowed $158.0 million under its variable funding note facility.
$4.1 billion of debt sounds a scary number, why are they considered a low debt company? The net income for Q1 was $121.6 million and growing. The debt isn’t being called up any time soon. It does restrict their ability to take on additional debt, but the high incoming and reliable revenue (long term contracts on each franchise) and physical assets (franchises borrowing equipment from Domino’s Pizza directly) means there are a lot of reassurances for anyone lending to Domino’s Pizza.
I didn’t have much to add on the value but then I did some extra digging. Price to income and cash flow Domino’s Pizza are considered overpriced and expensive.
However, if you look at the price to book ratio for the current financial year and previous two, Domino’s Pizza has almost the cheapest valuation out there, #72 out of 5,500 stocks. This is only one metric, by and large, this is an expensive stock to pick up.
As we shift our focus to the momentum, I wanted to highlight the future share price versus future growth estimates. The expected returns analyses the expected share price increase looking ahead 12 months. The expected growth is looking at revenue and EPS growth. A high dividend will drag on the share price but the future growth of the company looks very promising.
The momentum is high, with a lot of analysts flagging this investment as a buy. They have extremely strong future revenue and earnings growth, which is fueling the high confidence.
So what could possibly be the downside?
As of April 21, 2020, nearly all of the Company’s U.S. stores remain open, with dining rooms closed and stores deploying contactless delivery and carryout solutions. Based on information reported to the Company by its master franchisees, the Company estimates that as of April 21, 2020, there are approximately 1,750 international stores that are temporarily closed.
Company Withdraws Two- to Three-Year Outlook
Due to the current uncertainty surrounding the global economy and the Company’s business operations considering COVID-19, the Company is withdrawing its two-to three-year outlook for global retail sales growth, U.S. same store sales growth, international same store sales growth and global net unit growth.
They are throwing up the stop signs and preparing to underperform as the pandemic carries on. This seems a sensible move given the future is hard to predict and plan for right now.
This level headed approach has only added to the confidence in management to delivery.
A strong brand and franchise setup, good cash flow to keep them safe, high future growth prospects, a growing dividend, and damn tasty pizza. What isn’t to love?