Description
Business description: Domino’s Pizza is the largest operator of quick service pizza restaurants globally and in the US. About 50% of retail sales are from international markets and 49% from the US. More than 95% of system sales come from franchises.
Buy Recommendation: DPZ’s shares dropped after FY18 earnings allowing for a decent investment on a high-quality business with good growth.
Investment Thesis
1. Strong franchised business: Over 95% of retail sales from franchised operations.Charges 2.5-5.5% royalty fees on franchisee sales, leading to stable and growing revenues. The strong ecosystem allows for acceleration of store openings and re-investment into new stores and technology.
2. Digital initiatives: The company has invested alot into innovation and is ahead of competitors. Its mobile app provides a platform to rapidly expand its loyalty program to 20mn active users in three years and cut its cost base for store operations by reducing labor hours.
In the US, only 65% of delivery orders are from the online channel - so still alot of upside.
3. Growth from international markets: The Company estimates that internationally, it is only 60% penetrated.
The international division is expanding store footprint by close to ten percent. The Company could increase the number of stores by more than 60% in both developed and emerging markets.
4. Continued gains in the US: The Company has grown at high-single to low double-digit rates in the US and 50% of the pizza market is still served by independents.
Competitors such as Pizza Hut and Papa John’s are seeing about flat growth or reducing stores. I see continued opportunity for DPZ to capture market share.
5. Good capital allocation: Strong ability to return cash to shareholders while still re-investing in the business. ~35% of FCF is paid out in dividends, and management regularly executes recaps when debt levels drop. Number of shares have declined 22% in the past three years.
Valuation
· DPZ’s valuation multiples are about equal to peers despite superior unit growth and SSS. The stock de-rated after FY18 earnings, below its 5-year average.
· Price target $310 with ~15% upside based on 28x my 2020 EPS estimate.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
- strong international groth
- continued market share gains in the US
- Recaps