Most people that follow the stock market know that Domino’s is an excellent business. I wrote about Domino’s last year so I won’t rehash the entire story, but the highlights include: Domino’s enjoys major scale and relative market share advantages in its markets;
I thought the results were actually quite good...increasing order counts is very positive, underlying earnings power and competitive advantages are increasing (even if there is a little noise in the quarterly results and short term investments in technology platforms)...Short term price drops like this just provide more attractive prices for the company to deploy the cash from the German divestiture at higher rates of return through buybacks.
Thank you for the idea, great post. Just a quick question (I am not very familiar with the company), how is the relationship between the UK company and the holding? How easy is to change the terms of the agreement? How often has it happened in the past?
Thanks for reading and good questions. Almost all of Domino's international locations are managed under a master franchise relationship like Domino's Pizza group. The agreements are long-term in nature (typically ten years or more) and are renewed as long as the master franchise is executing. Domino's Pizza Group has been in existence for several decades and is one of Domino's largest master franchises and has exclusive rights to the UK and Ireland.
In general, Master Franchises pay roughly 3% of system wide sales to Domino's corporate, compared to ~5.5% for U.S. locations.
Thanks Dan. Just a final question: how should we think about the opportunity going forward? DOM's market share is already very high in their category, and I don't know whether additional (profitable) growth is feasible or not. When you look at net income growth over the last five years, it is almost stagnant. Do you have any thoughts?
Growth is just one element of the value equation, but I do expect reasonable growth in the core market. The franchisees have committed to basically 3-4% unit growth per year, and a reasonable expectation for same-store sales growth is also around 3-4% annually (consistent with pre-covid UK market results). That takes "medium-term" system wide sales growth to mid/high single digits (3-4% unit growth + 3-4% SSSG). Eventually unit growth probably tapers down (to 1-2%?). Earnings per share are what matter, and because it's a capital light business earnings should grow faster than sales, and are greatly aided by the new capital allocation framework.
On top of 6-8% earnings growth, per share results should be 4-6% better thanks to share repurchases at attractive prices, taking free cash flow per share growth into the double digits. A 4.4% dividend yield takes per share total returns into quite attractive territory. Re-rating of the stock to fair value helps even more as the stock should outperform the business.
Taken together, when you have a highly free cash flow generative business selling for a low valuation, you can produce excellent returns for investors with just modest revenue growth, which is a result I find likely here. AutoZone has followed this model for decades.
EPS has only grown about 6% annually over the last five years because it was masked by unprofitable international operations and investors were not being rewarded with as rational of a capital allocation framework as they are now, though results were far from a disaster previously.
I thought today's market move post 4Q22 earning was a little harsh on the stock
I thought the results were actually quite good...increasing order counts is very positive, underlying earnings power and competitive advantages are increasing (even if there is a little noise in the quarterly results and short term investments in technology platforms)...Short term price drops like this just provide more attractive prices for the company to deploy the cash from the German divestiture at higher rates of return through buybacks.
Hi Eagle,
Thank you for the idea, great post. Just a quick question (I am not very familiar with the company), how is the relationship between the UK company and the holding? How easy is to change the terms of the agreement? How often has it happened in the past?
Thanks!
Thanks for reading and good questions. Almost all of Domino's international locations are managed under a master franchise relationship like Domino's Pizza group. The agreements are long-term in nature (typically ten years or more) and are renewed as long as the master franchise is executing. Domino's Pizza Group has been in existence for several decades and is one of Domino's largest master franchises and has exclusive rights to the UK and Ireland.
In general, Master Franchises pay roughly 3% of system wide sales to Domino's corporate, compared to ~5.5% for U.S. locations.
Hopefully that's helpful!
Thanks Dan. Just a final question: how should we think about the opportunity going forward? DOM's market share is already very high in their category, and I don't know whether additional (profitable) growth is feasible or not. When you look at net income growth over the last five years, it is almost stagnant. Do you have any thoughts?
Thanks again!
Growth is just one element of the value equation, but I do expect reasonable growth in the core market. The franchisees have committed to basically 3-4% unit growth per year, and a reasonable expectation for same-store sales growth is also around 3-4% annually (consistent with pre-covid UK market results). That takes "medium-term" system wide sales growth to mid/high single digits (3-4% unit growth + 3-4% SSSG). Eventually unit growth probably tapers down (to 1-2%?). Earnings per share are what matter, and because it's a capital light business earnings should grow faster than sales, and are greatly aided by the new capital allocation framework.
On top of 6-8% earnings growth, per share results should be 4-6% better thanks to share repurchases at attractive prices, taking free cash flow per share growth into the double digits. A 4.4% dividend yield takes per share total returns into quite attractive territory. Re-rating of the stock to fair value helps even more as the stock should outperform the business.
Taken together, when you have a highly free cash flow generative business selling for a low valuation, you can produce excellent returns for investors with just modest revenue growth, which is a result I find likely here. AutoZone has followed this model for decades.
EPS has only grown about 6% annually over the last five years because it was masked by unprofitable international operations and investors were not being rewarded with as rational of a capital allocation framework as they are now, though results were far from a disaster previously.