Domino Pizza: Will Robotic Delivery Help Overcome “Pizza Fatigue” and Continue Along its Long-Term Growth Trajectory?
Domino’s Pizza (DPZ) has been on an interesting ride throughout the COVID-19 pandemic. The stock was one of the major beneficiaries of the stay-at-home economy due to the strength of its delivery business. During 2020, Domino’s saw its earnings-per-share rise by 29%, making it one of the best performing stocks in the quick service restaurant (otherwise known as QSR) segment. And yet, after this strong growth, shares of DPZ sold off in early 2021 because of investors’ fear that the reopening of the broader economy would mean that take-out/delivery demand would tail off, with consumers flocking back towards traditional dine-in restaurants.
Parkev Tatevosian, a Nobias 4-star analyst who writes for The Motley Fool recently touched upon the idea of “pizza fatigue” in a recent article, saying, “People cooped up in their homes for the better part of a year now have ordered a lot of pizza in that time. As more options on dining out are becoming available, some folks may seek alternatives to ordering pizza for a while. Admittedly, for now, this is an issue in the U.S, but if the vaccine rollout gains steam internationally, it will be an issue overseas as well.” However, when looking ahead to DPZ’s recent Q1 results, Tatevosian noted the company’s strong historical growth, which led his to his overall bullish conclusion that he summed up by saying, “If you zoom out and look at Domino's over the last decade, it has compounded revenue at an annual rate of 10% and EPS at a rate of 24%. Its business model works. People like pizza. If you buy and hold Domino's stock for the long run, it's very likely to add to your overall wealth.”
Well, as it turns out, Tatevosian was right. The fear that plagued DPZ shares prior to earnings was short lived. The pizza fatigue thesis died down as it became clear that the pandemic wasn’t going to disappear over right. DPZ shares have rallied roughly 30% since their early March lows in the $330 area. And today, with shares trading at $427.29, that begs the question, is Domino’s Pizza still a good buy?
To answer that question, we have to look at the company's fundamentals. Thankfully, Dan Weil, a Nobias 5-star analyst, recently covered DPZ’s Q1 earnings report for theStreet.com. He said, “Revenue registered $983.7 million in the quarter, up from $873.1 million a year earlier. The FactSet analyst consensus called for $985 million in the latest quarter.” Weil continued, noting that “Domino’s posted profit of $117.8 million, or $3 a share, down from $121.6 million, or $3.07, in the year-earlier quarter. Analysts expected earnings per share of $2.94 in the latest quarter.”
In other words, the results were mixed. DPZ beat expectations on the bottom-line, yet they were down year-over-year. However, the company missed revenue expectations, which caused the stock to sell-off a bit in response to the news. But, this weakness didn’t last long. Domino’s shares are up more than 4% since their Q1 report before the market opened on April 29th.
The bullish sentiment surrounding the stock appears to be due to same-store sales growth and management’s continued plans for significant international expansion. Weil highlighted DPZ’s sales comparisons, saying, “U.S. same-store sales gained 13.4%, beating analysts’ estimate of 9.7%. And international same-store sales climbed 11.8%, besting predictions of 6%.”
During Q1, Domino’s added 36 net locations in the United States and 139 net stores internationally. This pace of growth is slower than previously projected. Prior to the pandemic, Domino’s management laid out a plan to expand its global footprint to 25,000 locations by 2025. This goal coincided with a target annual revenue figure of $25 billion - which would essentially double the company’s 2017 annual revenue of $12.25 billion. However, it appears that COVID-19 has put up hurdles in these growth efforts. At this point its unclear as to whether or not the company will be able to hit its initial 2025 growth targets, but either way, investors appear to like the company’s plans to take significant QSR share in nearly 100 countries and this excited investors.
In an article from early April, Nikolaos Sismanis, a Nobias 5-star analyst writing at Seeking Alpha wrote about DPZ’s portfolio, saying that not only was Domino’s growing its store count, but, “What's amazing is that 98% of these locations are franchised, which means that the company enjoys a steady stream of royalties that grows over time without Domino's having to finance these locations itself and undertake the operational risks attached.”
Sismanis highlights the relatively asset light nature of Domino's franchise driven model, which passes along risks to the franchisees while the cooperation collects royalty fees on revenues. Yet, he says, it’s not as if the company is sitting back on its haunches, lazily collecting royalties. Sismanis notes that the company continues to push the envelope as far as operational and supply chain effectiveness goes, which has led to industry leading same-store sales growth. He says, “In its U.S. stores, same-store sales have grown for 39 consecutive quarters, while its international forefront, the same figure has grown for 108 consecutive quarters. This is utterly amazing considering how big Domino's brand has gotten over the years, yet with no signs of slowing down.”
As the company’s physical footprint expands, Sismanis expects for the company’s profit margin to expand as well. Regarding margins, he said, “Domino's royalties essentially enjoy net margins of 100%. The margin-compressor part of its business model is its supply chain. Supply chain revenues are set to grow automatically as locations, and same-store sales continue to expand. Hence, they grew by 15.4% YoY. Through economies of scale, the supply chain segment should also see its margins expand over time amid enhanced efficiencies.”
Sismanis concludes his article saying, “Mr. Market clearly misprices Domino's, especially when we consider the rest of the company's qualities such as its strong brand, recession-proof, hustle-free cash flows, and predictable growth.” He places a $450 price target on shares, saying, “If we plug in a share price of $450 in our calculations as the value of the stock today, investors appear to still be seeing borderline double-digit results in the medium term if the stock retains a reasonable P/E of 30. Combined with our DCF result, we believe that shares are worth at least $450 today.”
An interesting headline that several of our 4 and 5-star analysts highlighted recently surrounded news that Domino’s has recently begun testing out autonomous delivery robots in Houston, Texas, to help it keep up with growing delivery demand while keeping costs down (robots work for free, as opposed to delivery drivers). Rhian Hunt, a Nobias 5-star analyst recently covered this news for The Motley Fool, saying that “The robots used are R2 autonomous delivery vehicles, produced by privately held California-based Nuro.” Hunt highlighted DPZ’s pandemic success, stating that “Domino's, like several other restaurant chains easily capable of switching to a delivery model, made significant gains during 2020's COVID-19 lockdowns, with its market share climbing to 37% compared to 29% five years ago.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
It’s clear that other leading QSR firms are looking for ways to control expenses in the delivery space, as well. Hunt touched upon the fact that Domino’s isn’t alone in its partnership with Nuro, writing, “Another restaurant chain that strengthened its position during the pandemic, Chipotle Mexican Grill, also recently expressed interest in Nuro's R2. The Mexican-style fast-casual restaurant invested directly in Nuro several weeks ago as part of its effort to provide cutting-edge digitally powered service.”
Domino’s willingness to invest in its own delivery service appears to have recently caught the eye of famed activist investor, Bill Ackman, who recently acquired a 6% stake in DPZ via his investing firm, Pershing Square. News of Ackman’s stake caused DPZ shares to pop another 3%.
Jamie Wilde, of The Morning Brew, recently quoted Ackman, discussing his bullish outlook for DPZ’s delivery investments, saying, “That is an important competitive advantage in a world where you want to deliver pizza for $7.99. It’s hard to do that with a delivery service taking a massive cut of the proceeds.”
Regarding Ackman’s interest, Wilde said, “Pershing is known for its investments in profitable food chains, including Restaurant Brands International (the owner of Burger King), McDonald’s, Chipotle, and Starbucks—where Ackman made a venti-sized 73% return in just 19 months.”
Obviously the past cannot predict the future, but Ackman’s investment appears to bode well for Domino’s recent rally continuing. 4 and 5-star Nobias analysts agree, with 8 recent “Buy” ratings being published on the stock compared to just 3 “Sell” ratings.
Disclosure: Nicholas Ward is long DPZ. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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