INVESTMENT THESIS
Domino’s Pizza Inc. (NYSE: DPZ).
We think that DPZ is better positioned during the pandemic than most competitors given its strong brand and emphasis on online ordering and pizza delivery. Management thinks it is particularly important to make ordering and deliveries easy. We think management is avoiding the use of third-party delivery services in order to maintain strong customer relationships and enhance profitability.
RECENT DEVELOPMENTS
Domino’s reported third-quarter results on October 8. The shares fell 7% following the release.
We note that international comps have increased for 107 consecutive quarters. The company opened 83 net new stores in 3Q20, consisting of 39 international stores and 44 U.S. locations.
Overall G&A expense rose $8.0 million to $91.7 million. G&A fell to 9.4% of revenue from 10.2% a year earlier but was 10 basis points above consensus.
EARNINGS & GROWTH ANALYSIS
Domino’s has been spending aggressively on its e-commerce platform, and e-commerce sales now account for more than 70% of U.S. revenue.
Given the growing popularity of online ordering, we believe that ease-of-use will be a priority for consumers and expect Domino’s carryout and delivery businesses to benefit. We also expect the company to grow through new store openings in the U.S. and internationally.
FINANCIAL STRENGTH & DIVIDEND
On March 31, 2020, Domino’s announced that it had drawn down a $158 million variable-rate note that remained available from a previous line of credit.
In late 2019, the company authorized a $1.0 billion share repurchase program. This replaced the remaining $53.6 million available under a previous $750 million authorization.
Operating income covered interest expense by a factor of 4.2 in the third quarter, unchanged from the prior-year period. We think the interest coverage ratio should be above 5.0.
Domino’s resumed quarterly dividend payments in March 2013 after suspending its regular payout in early 2007. The company did pay a $13.50 per share special dividend in 2007 as part of a recapitalization plan and another $3 special dividend in March 2012.
MANAGEMENT & RISKS
On July 16, 2020, management announced that CFO Jeffrey Lawrence would retire. He will continue to serve as CFO until a successor is found.
Domino’s Pizza is subject to competition that would be considered extreme in almost any other industry, but is considered normal for quick-service restaurants. Moreover, the company has faced additional pressure in recent years as delivery menus have expanded to meet consumer demand for ‘healthy’ and ‘gourmet’ fare. There has also been strong growth in the casual dining segment over the past few years, and casual dining establishments have begun to challenge the delivery segment by expanding takeout service and, in some cases, by offering delivery as well. Within its segment, the company competes not only with other large pizza delivery chains, but also with many local pizzerias.
In our opinion, the company will likely face increasing difficulty in obtaining domestic franchisees unless it sacrifices margins in its distribution operations.
With a market capitalization of about $15.8 billion, Domino’s Pizza is considered a mid-cap issue, despite the company’s strong name recognition.
COMPANY DESCRIPTION
The company completed its initial public offering in July 2004.
VALUATION
Since the company’s IPO in July 2004, they have traded at an average multiple of 22.8. However, we believe the premium valuations are warranted given prospects for accelerating comp sales and earnings.
On October 21, BUY-rated DPZ closed at $389.95, down $1.13.
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