Last week, Domino’s Pizza (NYSE: DPZ) announced its new Pinpoint Delivery system, allowing customers to place an order without an address. With this new delivery system, customers can place a pin on a map and get pizza delivered to any location, such as the beach, a park, or the baseball field. Domino’s is the first QSR (Quick Service Restaurant) brand to release this type of delivery technology.
This isn’t the first breakthrough feature they have released this year. In April, Domino’s announced the offering of delivery services through Apple CarPlay, again, one of the first QSR restaurant brands to do so.
However, as Domino’s gets close to its 52 week lows, it’s important to look at their financials and see the quality of this business. Domino’s has increased its total revenues at a CAGR of 10% over the last 10 years, an impressive rate compared to many of its similar-sized competitors. Over the same time period, Domino’s has grown its profits, EPS, and EBITDA over the last 10 years at a CAGR of around 8%, 18%, and 10%. Their free cash flows have grown at a CAGR of 10% and net income has grown at a CAGR of 12%.
Additionally, Domino’s management has frequently rewarded shareholders via stock buybacks. In the past 10 years, outstanding shares have fallen by 36%, showing management’s aggressive share buyback program. Domino’s has also been able to maintain an incredibly efficient business, with a ROIC of over 71%. While stock buybacks certainly drive value for shareholders, this high ROIC shows the high level of profitability that this business can achieve from the capital invested into its operations.
Looking at publicly traded counterpart and large competitor Papa John’s, we can see how unique Domino’s is in its financial metric growth. Papa John’s has grown its total revenues at a CAGR of 4% over the past 10 years, and has grown its profits, EPS, and EBITDA at CAGRs of 7%, 4%, and 4.5%, respectively, over the same timeframe. Looking further, we can see that Papa John’s free cash flows have shrunk, with a CAGR of -0.8%.
While Papa John’s also has a history of stock buybacks (22% decrease in shares outstanding over the last 10 years), they operate much less efficiently, with a ROIC of 30.9%.
Domino’s is currently trading at a NTM P/E multiple of 24.5x earnings, a multiple well off their 10 year average of 29.51x. Additionally, the company is trading at a NTM Levered FCF Yield of 4.57%, a figure far larger than their 10 year average of 3.32%.
One bear case for Domino’s business model is that it has the potential to be heavily affected by aggregators and online food delivery platforms, which offer cheaper delivery and more food options, affecting the market penetration of pizza in the food delivery market. However, there are logistical downsides to new services such as DoorDash and Uber Eats that are unavoidable due to their distributed and non-centralized delivery system. Domino’s efforts to continue to innovate within the delivery space could allow it to maintain a lasting competitive advantage.
Adding further to this, Domino's uses a strategy called fortressing to strategically saturate specific markets with a high density of its stores. This approach involves opening multiple stores in close proximity to one another, creating a network of locations that allows for efficient delivery and shorter wait times. By implementing fortressing, Domino's aims to gain a competitive advantage by providing faster and more convenient service to customers within a targeted area, ultimately boosting sales and market share. This strategy is anchored down by Domino’s management, who hold a strong conviction in the fact that customers won’t go more than a half-hour to pick up a carryout pizza. Some bears have claimed that this strategy will be met with massive pushback from franchisees, however, that doesn’t seem to be the case. This system has been around for over a decade, and while it does lead to same store sales declines in some markets, most areas are generally served by one or two large franchisees, largely mitigating the risk of pushback from franchisees.
Domino’s diverse menu also gives it a competitive advantage to other large QSR pizza chain restaurants. They currently offer a wider range of menu options than many of their biggest competitors, such as Papa John’s and Pizza Hut. Some specialty chains (like California Pizza Kitchen) offer a more diverse menu, but do so at a much higher cost.
One potential cause for concern about the company occurred when former CEO, Patrick Doyle, left the company in 2018. Patrick Doyle, who had been the company’s CEO since 2010, transformed the struggling Dominoes brand into the darling of the restaurant industry. Looking at the growth figures of revenues, free cash flows, and profits since 2010, we can see just how influential he was for the company. Despite these concerns about the leadership transition, the company still continues to grow. Weiner, who joined the company in 2008 as a chief marketing officer, has been a part of major campaigns that have helped Domino’s improve its brand image during his tenure. During his tenure as the head of Domino's U.S. business from 2008 to 2021, Russell Weiner played a crucial role in the company's remarkable growth. Under his leadership, retail sales soared from around $3 billion to over $8 billion, and the number of stores increased by more than 25%. As a result, Domino's doubled its market share in the QSR pizza industry in the United States. Weiner's strategic direction also led to a significant boost in Domino's digital presence, with the digital sales mix in the U.S. jumping from 11.5% to more than 75%.
Weiner's innovative initiatives played a pivotal role in transforming the brand. He spearheaded the reformulation of over 80% of the menu, ensuring improved quality and taste. Weiner's leadership also saw the introduction of the DXP pizza delivery vehicle, as well as the testing of autonomous delivery platforms. He championed numerous digital advancements, including the Domino's AnyWare platform, which expanded the company's digital accessibility and convenience for customers. In recognition of his outstanding contributions, Weiner was named Brandweek's Marketer of the Year in the restaurant category for 2010.
Looking at Quiver Quantitative’s alternative data, we can see several large financial institutions and asset managers have been adding to their holdings of $DPZ stocks. On Quiver Quantitative’s Institutional Holdings Dashboard, we can see that large institutional investors like T. Rowe Price, Renaissance Technologies, Point72 Asset Management, and Holocene Advisors have added to their DPZ positions. For example, Renaissance Technologies had a change in shares of +48% (as filed on 03/31), with Point72 Asset Management adding a new $100 million dollar position of 310,000 shares (as filed on 03/31). You can check out all of Domino’s Pizza’s recent institutional holdings data with Quiver Quantitative.
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