2023-04-30 00:37:26 ET
Summary
- DPZ's Q1 results were solid, but delivery SSS and keeping menu prices stable are two potential yellow flags.
- Long term, DPZ is largely about international expansion.
- Its valuation is now around pre-pandemic levels.
Domino’s Pizza ( DPZ ) put up solid Q1 results and is an international expansion story, but there were a couple yellow flags that popped up.
Company Profile
DPZ owns and franchises pizza restaurants around the world. Its primary offering is pizza with various toppings and crusts, but it also sells pasta, boneless chicken and chicken wings, oven-baked sandwiches, desserts, and other items, including local food offerings.
At the end of Q1, it had over 20,000 locations in over 90 markets. The company has over 6,700 restaurants in the U.S. and 13,300 locations in international markets. Only 285 of its locations were company owned, with all of them in the U.S.
Over 99% of DPZ’s locations are franchised. As such, the company’s primary source of revenue is through royalties and fees it charges to its franchisees. Royalty fees are generally 5.5% on sales. It also makes money by selling food, equipment, and supplies to franchisees in the U.S. and Canada. Its largest franchise, Domino’s Pizza Enterprises, which is publicly traded in Australia, owns about 19% of its locations.
Q1 Earnings
For Q1, DPZ saw revenue rise 2.2% to $1.02 billion. Excluding currency, revenue jumped 5.9%. That was just below the $1.04 billion revenue consensus .
U.S. stores saw same-store growth of 3.6%, with company-owned restaurant comps up 7.3%. International SSS edged up 1.2%.
Delivery same-store sales fell -2.1%. The company said this part of the business is being pressure by a return of sit-down service, as well as pressure on lower-income customers given delivery fees.
On the Q1 call, CEO Russel Weiner said:
“The second theme we discussed on our last call was the need to maintain value in what is a competitive marketplace where our customers decide every day where to spend their hard-earned dollars. Value has to do with the right balance of price and service. Our U.S. business delivered on both of these things in Q1, and I'll start with pricing. On pricing, I mentioned that we and our franchisees have got to be mindful that value on our menu exists outside of our national offers.
“Menu prices and delivery fees were relatively stable throughout Q1, that means most of the menu pricing increase we saw in the first quarter versus prior year was carryover from changes that were made in 2022. On service and capacity, our stores and our franchisees continue to make progress on both fronts. Estimated average delivery times in the first quarter were over a minute better than the first quarter of 2022. While our goal is to get back to and improve on our delivery service levels from 2019, I'm really encouraged by the continued improvement we and our franchisees have made in this critical measure.”
Adjusted EPS rose 17% to $2.93 from $2.50. Analysts were looking for EPS of $2.72.
The company generated free cash flow of $96 million in the quarter.
Looking ahead, the company said that it expects its global retail sales growth and unit growth to trend toward the low end of its unchanged 2- to 3-year outlook of 4-8% for 2023. The company said the continued weakness in the U.S. delivery business is the main culprit.
Overall, DPZ put up a solid but largely in-line quarter. The company is seeing headwinds in its delivery business, and it doesn’t seem to have much further pricing power. Right now, there seems to finally be some consumer pushback on fast-food and takeout prices, as also evidenced by McDonald’s comments that its customers are ordering less food such as fries with their meals.
I wouldn’t be surprised if this takeout food slowdown becomes more pronounced later in the year, as we are not currently in a recession.
Opportunities and Risks
Longer term, expansion is still the biggest opportunity for DPZ. The company believes it still has the potential for over 8,000 stores in the U.S., which is nearly 20% more than its current store base. Meanwhile, it sees the opportunity for about 8,500 stores in developed markets and nearly 11,400 in emerging markets. Overall, that’s a nearly 50% increase in restaurant count in international markets.
Fortunately for DPZ, it has several large franchisees that are looking to continue grow their locations. In fact, six DPZ franchisees are publicly traded on global stock exchanges. DPC Dash is the latest DPZ franchise to go public, IPO’ing on the Hong Kong Exchange in March.
The trends in delivery are another potential opportunity. About 2/3 of DPZ sales come from delivery, and the company has been synonymous with delivery since before food delivery became a huge global phenomena. As delivery continues to grow, it should benefit DPZ given its large in-house delivery network. However, more recently, delivery has been a drag, and other companies, including MCD, have noted that the pace is slowing. Delivery is expensive for the consumer, so it does make sense that they pull back on delivery during a period of budgetary pressures.
DPZ is also looking to improve its e-commerce platform and other technology to help drive sales. It is also increasing the technology fee it charges franchises from 31.5 cents to 39.5 cents. This is per transaction fee, so it should be a pretty nice boost to revenue. Technically, though, it should be offset as part of expenses. Nonetheless, technology and e-commerce improvements should help drive sales.
DPZ has also benefited from inflation and price increases. In 2022 it increased prices by 5.4%, but in Q1 the talk was of trying to keep menu prices stable. As such, the company seems a bit reluctant to push price while many other restaurants have been. Fortunately, as primarily a franchise operator, it also doesn’t have to deal too much with food or wage inflationary pressures, as this falls more on the restaurant operator.
Valuation
DPZ stock trades at 18.7x the 2023 EBITDA consensus of $871.2 million and 17.3x the 2024 EBITDA consensus of $939.7 million.
From a P/E perspective, it trades at 24.3x 2023 EPS estimate of $13.08. Meanwhile, it's valued at about a 21.5x 2024 EPS estimate of $14.78.
The company is projected to see revenue growth of 2% this year and 5.5% next year.
The stock trades around the same valuation as MCD and Yum! Brands ( YUM ), the owner of Pizza Hut, and is more expensive than fellow pizza restaurant operator Papa John’s ( PZZA ).
Conclusion
DPZ is largely an international expansion story that continues to chug along. Franchise models are attractive and help restaurant operators avoid issues like wage and food inflation pressures, so they tend to get nice multiples from the market.
The company had solid Q1 results, although there are some yellow flags with delivery same-store sales down and talk about keeping menu and delivery prices stable in an inflationary environment. International held up well, but we’ll have to see how emerging markets hold up if a global recession hits.
At this time, DPZ looks close to fairly valued based on where it has traded historically pre-pandemic. As such, given the potential headwinds, I am mostly neutral on the name at this time.
For further details see:
Domino's: Delivers Solid Q1, Along With A Couple Of Yellow Flags