As the company grows, it gains the advantages of scale, with the advertising budget naturally swelling alongside system sales. For one, the pizza market is still quite fragmented, with Domino's share still below 23% domestically versus a combined 48% for regional and independents. On a longer-term horizon, management thinks there is scope for around 40,000 global Domino's outlets, representing a doubling of its current tally, including 8,500 domestic stores. That has now been narrowed to annual unit count growth of 1,100 (equal to a ~5% CAGR) and 7% annualized system sales growth through 2028. Previously, this included a 5-7% range in terms of unit count growth and a 4-8% range in terms of system sales growth. Fortunately, management basically reaffirmed its long-term growth algorithm at the company's recent Investor Day. The crux of the bull case here rests on that last sentence. There are also some nice positive sales drivers in the short term, with Domino's announcing a revamped loyalty program at the end of Q3 and expanding delivery via partnership with Uber Eats. The key point is that the pizza franchisors seem especially vulnerable in this sort of macro climate, though as I said it is not a major long-term concern of mine, especially as it is mitigated to a degree by ongoing global store count expansion. While third quarter SSSG was admittedly 3.5ppt higher than at Domino's (+2.9% versus -0.6%), it was hardly spectacular in inflation-adjusted terms. Note that comps at recently covered peer Papa John's ( PZZA) have not been spectacular by any means either, with the company reporting just 0.4% SSSG over the first three quarters of the year. As mentioned above, underlying returns for franchisees are still very attractive, but weak comps just happen to be a larger issue for the pizza players compared to other restaurant operators. Third quarter SSSG was actually a negative 0.6% print, driven by a 0.7% drop in same-store sales across the franchised estate. As a result, comps have been somewhat soft here, with the company reporting just 1% year-on-year same-store sales growth ("SSSG") for the year through Q3. Folks thus have more scope to realize deals and keep tickets price down. For want of a better phrase, ordering a pizza is a more anti-social experience than you see at other restaurant concepts, and a very high portion of Domino's sales (~80%) already come through the digital channel. Now, one thing I would point out about the pizza stocks like Domino's is that the ordering process is less amenable to capturing price hikes compared to the likes of McDonald's ( MCD). The macro-environment in 2023 has proved somewhat of a challenge for the company, with consumer finances becoming an increasingly important issue on the back of elevated inflation. In Q3, Domino's reported only one store closure among the 6,449 franchised stores it had at the start of the period - a good sign that unit-level economics are indeed pretty good. That is a very attractive proposition for franchisees, and it is little wonder that the domestic store count has been growing at a respectable clip.Īnother quicker way of checking restaurant-level health is to look at the rate at which franchisees are closing stores. Cash-on-cash returns thus land at around the 40% mark. That is admittedly down a bit from the COVID boom years, but initial investment requirements are also quite low for a Domino's store: Notwithstanding the recent bout of inflation, they are probably somewhere in the $400K region. With that, Domino's franchisees are currently earning around $155,000 in annual EBITDA per store on average as per the most recent earnings call. At the end of the day, franchisees that earn good returns on their initial investment are highly incentivized to open up new stores, and in the long run that will map to growth at the corporate level too. The first port of call in any discussion of franchised restaurant stocks is store-level profitability. While some of the former is admittedly showing up in results here, the long-term growth outlook remains attractive, and I open on Domino's with a Buy rating. The global pizza franchisor has ultimately seen its shares return around 20% so far this year, with earlier fears of a slowdown in demand giving way to improved franchisee-level profitability and expectations that long-term growth will continue at an attractive clip. Domino's Pizza ( NYSE: DPZ) has been on a bit of a rollercoaster ride this year.
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