Domino’s Pizza LON:DOM, the world’s largest pizza delivery chain, has for a long time been a darling of the stock market.
Its ubiquitousness, its strong branding, the spacious headroom for margins, and its historic returns from investment have meant that it has been making dough for hungry families and investors since its debut in London in 2016.
The waft of earnings from the food retailer has been as salivating as a freshly-baked Margherita, but will the stock continue to rise like fresh dough, or will investors get stuck at the bottom of the oven and risk getting burned?
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The company is also listed in the US under the ticker NYSE:DPZ, ‘Domino’s Pizza Group plc’ is the UK and Ireland master franchise of Domino’s Pizza, Inc., the US entity and operates over 1,200 Domino’s Pizza stores in the British Isles, although most of these are operated by franchisees.
Domino’s has around 19,000 stores in over 85 countries, not bad for a company set up by two brothers with a USD900 loan out of one kitchen in Michigan (where the company’s corporate headquarters remain today) in the 1960s. It took 20 years for Domino’s to expand its brand internationally, when it crossed the Great Lakes and opened an outlet in Winnipeg, Canada, but by that time it was well on its way to its 1,000th store.
Despite the company turning out pizza galore, and helping takeaway pizza supplant ‘The Chinese’ as the UK’s favourite takeaway meal, the corporation has of late been a difficult place to work, with seven CFOs walking into and then leaving the boardroom, and four different CEOs testing out the top chair since 2019. The company has had an ongoing row with its franchises over profit sharing which it settled – for the time being – in 2021.
Lockdown order spike and a cancelled dividend
The Coronavirus lockdown saw a spike in orders for Domino’s, but the company cancelled their dividend, on uncertainty and argued it had to hire a lot more delivery drivers. The chaos has left investors feeling less than impressed, and in June nearly one-quarter of shareholders voted against the proposal that the new CEO get a GBP6.8m bonus if the company hits certain targets.
Domino’s makes the majority of its money in the UK off franchisees, selling them the supplies they need to run the business and dealing with the menu options, national marketing and advertising (and there are a lot of Domino’s adverts across all media channels). Domino’s doesn’t release its advertising costs, but is reckoned to be the biggest spender in the pizza sector and the corporate entity also spends heavily on product development, technology – especially its apps – and promotions. The franchisees set their pricing, pay their staff, and maintain and open new stores. Domino’s in the UK is itself a franchise of Domino’s in the US and in the UK doesn’t make its money from selling and delivering pizza, but from supplying and supporting its franchises.
The company is exposed to the volatility of food commodities (although its franchises have born the brunt of energy inflation) but has the flexibility to pass these costs onto its franchises. The model is low in terms of capital investment, high in terms of cash generation, but this has caused issued at Domino’s HQ, with its franchisees saying that Domino’s wasn’t sharing the cost of inflation, and eventually corporate was forced to add new incentives and support to the franchises.
Domino’s Pizza focussing on UK and Ireland
Domino’s has to keep these guys close if it wants to continue growing, but then comes the issue of how much can it grow? The more franchises it opens, the less its existing franchises will earn, as new stores will inevitably cannibalize the turf of existing outlets and compared to other fast-food options like McDonald’s and Pizza Hut, there are a lot more Domino’s per square mile in the UK than its near competition. The company as a whole has also been withdrawing from other markets, including Scandinavia, Russia, Germany and Switzerland in the last few years and focussing its growth in the UK and Ireland.
Also, the barriers to entry in the pizza sector are not massively high – they are flour, yeast, tomatoes, cheese and an oven – and although Domino’s has national supremacy, on a local level more artisan (higher margin) pizzerias are gaining popularity in certain areas. That’s why Domino’s has to keep its advertising spend and brand recognition high.
In its latest results for 1H23, published at the start of August, all the matrices were prefixed by a ‘+’ sign. Sales (to franchisees) were up 7.9% to GBP766.4m, orders were up 2.8% to 35.4 million, revenue was up 19.6% to GBP332.9m. Statutory Profit After tax was up 90.5% to GBP80.2m. However, underlying profit before tax was dead at 0% at GBP50.9m, excluding a GBP40m profit on the sale of its German franchise.
Can Domino’s Pizza continue to grow?
The pluses are welcome, and expected, but the concerns are the rate of growth. Over the last few years the pluses have had increasingly smaller figures after them, and in a cost-of-living culture, takeaways are often the first luxury sacrificed in a family’s budget.
The company not only has had to play nice with franchisees, but it’s been trying to keep its shareholders onside. That protest vote although still in a minority, was not-so-insubstantial to be ignored and the company has been undertaking a share buyback scheme, having bought GBP13.9m of GBP20m since May, and announcing a GBP70m follow-up when the GBP20m tranche is complete. Dividends are back too, with a 3.3p interim announced; up on the 3.2p for the corresponding period in 2022.
If you own a slice of Domino’s it’s worth holding onto, at least over the mid-term. However, if you are coming in cold, is Domino’s still a tasty option, or has it been overcooked?
