Domino's is not a company that needs an introduction. But let's start there:
"Domino's Pizza, Inc. is a pizza restaurant chain. The Company operates pizza stores at 12,500 locations in over 80 markets. It operates through three segments: domestic stores, international franchise and supply chain. Its Domestic Stores segment consists primarily of its franchise operations, through which it operates network of over 4,820 franchised stores located in the United States. Its International Franchise segment consists of a network of franchised stores in approximately 80 international markets. Its supply chain segment operates approximately 20 regional dough manufacturing and food supply chain centers in the United States; a thin crust manufacturing center; a vegetable processing center, and a center providing equipment and supplies to certain of its domestic and international stores. Its basic menu features pizza products in various sizes and crust types. Its stores also offer oven-baked sandwiches, pasta, bread side items, desserts and soft drink products."
There are many behavioral aspects of investing that deserve attention and Domino's brings forward a particularly serious one. It is stock that has gone from a market cap of $260M to $7.8b currently in eight years, that's a compounded return of 53% annualized, excluding dividends. That's a cumulative 3000%! While it is unrealistic to expect someone to have invested at the low point of valuation 2008/09, it does beg the question: why didn't so many people buy it during its monster run up?
I believe the answer is that many people were a) busy trying to time the market b) thought the stock had gone up too much c) didn't pay attention to the operating results the business was producing (and continues to produce).
Any serious investor should read Domino's earnings release. It is a thing of beauty and should leave you absolutely speechless. If you still focus on the valuation of the stock (and say it is too expensive because it has a high P/E, I do not know what to say to you).
Here's a link:
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzU1MDU2fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636123908210285394
There are a few things that you should immediately note.
SSS are fabulous. That doesn't need any explanation. 13% SSS growth in the U.S. 6.6% internationally. Fantastic result. Plus they are expanding viciously internationally (I think they opened their first store in Sweden) and opened 300 in the quarter. The stock is growing top line at a fantastic rate.
But is the growth profitable? All this growth must require huge CAPEX, right?
Yes, in most cases, but not in Domino's case. Have a look at their income statement and you will notice four sources of revenues.
1) Domestic Company-owned stores
2) Domestic franchise
3) Supply chain
4) International franchise
So what's happening here? Domino's runs a franchise - franchisee model. The following page gives interested franchisees good details of the what it takes to join to Domino's family.
http://www.franchisedirect.com/foodfranchises/dominos-pizza-franchise-07460/ufoc/
The biggest source of their revenues are Supply Chain. The 10K explains what this line items captures:
"Our supply chain segment operates 18 regional dough manufacturing and food supply chain centers in the U.S., one thin crust manufacturing center, one vegetable processing center and one center providing equipment and supplies to certain of our domestic and international stores. We also operate five dough manufacturing and food supply chain centers in Canada. Our supply chain segment leases a fleet of more than 500 tractors and trailers. During 2015, our supply chain segment accounted for $1.38 billion, or 62% of our consolidated revenues.
Our centers produce fresh dough and purchase, receive, store and deliver quality food and other complementary items to over 99% of our U.S. and Canadian franchised stores and all of our Company-owned stores. We regularly supply over 5,600 stores with various food and supplies. Our supply chain segment made approximately 581,000 full-service deliveries in 2015 or approximately two deliveries per store per week, and we produced over 415 million pounds of dough during 2015.
We believe our franchisees voluntarily choose to obtain food, supplies and equipment from us because we offer the most efficient, convenient and cost effective alternative, while also offering both quality and consistency. Our supply chain segment offers profit-sharing arrangements to franchisees who purchase all of their food for their stores from our centers. These profit-sharing arrangements generally offer participating franchisees and Company-owned stores with 50% (or a higher percentage in the case of Company-owned stores and certain franchisees who operate a larger number of stores) of their regional supply chain center’s pre-tax profits. We believe these arrangements strengthen our ties and provide aligned benefits with franchisees."
These supply chains have a mark up. Based on Q3 numbers, the mark up is 11%. This is pretty consistent with 2015 figures (which come up slightly lower at 10.7%). But then Domino's also collects royalties on revenues of around 5.5% from stores, so that's where the Domestic and International Franchise revenues come in. Overall, before corporate expenses, operating margins are 31% of sales. That is absolutely fantastic in terms of store economics from the perspective of Domino's Pizza. The ROIC is through the roof here.
After taking into account corporate expenses (termed "General and Administrative"), operating margins clock in around 17.8%. Show me another restaurant company growing at a vicious pace with those kind of operating margins. It is truly impressive.
The secret to the franchisee model is of course that there is no CAPEX spend for Domino's when it comes to new store opening. Here is the punchline for franchisees interested in joining the family:
"Financial Assistance: No direct or indirect financing is offered to the franchisee. The franchisor does not guarantee the franchisee’s note lease or obligation. Franchisees of the Domino's Pizza system are eligible for expedited and streamlined SBA loan processing through the SBA's Franchise Registry Program."
This company produces gobs of free cash flow due to the low CAPEX needs emanating from the business model. Last quarter, FCF was $124MM and of course they have a dividend and share buy back program in place.
Still think 32X NTM EPS is expensive? I think the Domino's story remains strong. The international opportunity remains and with a proven business model, Domino's could continue to surprise the Street. Stay bullish...
"Domino's Pizza, Inc. is a pizza restaurant chain. The Company operates pizza stores at 12,500 locations in over 80 markets. It operates through three segments: domestic stores, international franchise and supply chain. Its Domestic Stores segment consists primarily of its franchise operations, through which it operates network of over 4,820 franchised stores located in the United States. Its International Franchise segment consists of a network of franchised stores in approximately 80 international markets. Its supply chain segment operates approximately 20 regional dough manufacturing and food supply chain centers in the United States; a thin crust manufacturing center; a vegetable processing center, and a center providing equipment and supplies to certain of its domestic and international stores. Its basic menu features pizza products in various sizes and crust types. Its stores also offer oven-baked sandwiches, pasta, bread side items, desserts and soft drink products."
There are many behavioral aspects of investing that deserve attention and Domino's brings forward a particularly serious one. It is stock that has gone from a market cap of $260M to $7.8b currently in eight years, that's a compounded return of 53% annualized, excluding dividends. That's a cumulative 3000%! While it is unrealistic to expect someone to have invested at the low point of valuation 2008/09, it does beg the question: why didn't so many people buy it during its monster run up?
I believe the answer is that many people were a) busy trying to time the market b) thought the stock had gone up too much c) didn't pay attention to the operating results the business was producing (and continues to produce).
Any serious investor should read Domino's earnings release. It is a thing of beauty and should leave you absolutely speechless. If you still focus on the valuation of the stock (and say it is too expensive because it has a high P/E, I do not know what to say to you).
Here's a link:
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzU1MDU2fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636123908210285394
There are a few things that you should immediately note.
SSS are fabulous. That doesn't need any explanation. 13% SSS growth in the U.S. 6.6% internationally. Fantastic result. Plus they are expanding viciously internationally (I think they opened their first store in Sweden) and opened 300 in the quarter. The stock is growing top line at a fantastic rate.
But is the growth profitable? All this growth must require huge CAPEX, right?
Yes, in most cases, but not in Domino's case. Have a look at their income statement and you will notice four sources of revenues.
1) Domestic Company-owned stores
2) Domestic franchise
3) Supply chain
4) International franchise
So what's happening here? Domino's runs a franchise - franchisee model. The following page gives interested franchisees good details of the what it takes to join to Domino's family.
http://www.franchisedirect.com/foodfranchises/dominos-pizza-franchise-07460/ufoc/
The biggest source of their revenues are Supply Chain. The 10K explains what this line items captures:
"Our supply chain segment operates 18 regional dough manufacturing and food supply chain centers in the U.S., one thin crust manufacturing center, one vegetable processing center and one center providing equipment and supplies to certain of our domestic and international stores. We also operate five dough manufacturing and food supply chain centers in Canada. Our supply chain segment leases a fleet of more than 500 tractors and trailers. During 2015, our supply chain segment accounted for $1.38 billion, or 62% of our consolidated revenues.
Our centers produce fresh dough and purchase, receive, store and deliver quality food and other complementary items to over 99% of our U.S. and Canadian franchised stores and all of our Company-owned stores. We regularly supply over 5,600 stores with various food and supplies. Our supply chain segment made approximately 581,000 full-service deliveries in 2015 or approximately two deliveries per store per week, and we produced over 415 million pounds of dough during 2015.
We believe our franchisees voluntarily choose to obtain food, supplies and equipment from us because we offer the most efficient, convenient and cost effective alternative, while also offering both quality and consistency. Our supply chain segment offers profit-sharing arrangements to franchisees who purchase all of their food for their stores from our centers. These profit-sharing arrangements generally offer participating franchisees and Company-owned stores with 50% (or a higher percentage in the case of Company-owned stores and certain franchisees who operate a larger number of stores) of their regional supply chain center’s pre-tax profits. We believe these arrangements strengthen our ties and provide aligned benefits with franchisees."
These supply chains have a mark up. Based on Q3 numbers, the mark up is 11%. This is pretty consistent with 2015 figures (which come up slightly lower at 10.7%). But then Domino's also collects royalties on revenues of around 5.5% from stores, so that's where the Domestic and International Franchise revenues come in. Overall, before corporate expenses, operating margins are 31% of sales. That is absolutely fantastic in terms of store economics from the perspective of Domino's Pizza. The ROIC is through the roof here.
After taking into account corporate expenses (termed "General and Administrative"), operating margins clock in around 17.8%. Show me another restaurant company growing at a vicious pace with those kind of operating margins. It is truly impressive.
The secret to the franchisee model is of course that there is no CAPEX spend for Domino's when it comes to new store opening. Here is the punchline for franchisees interested in joining the family:
"Financial Assistance: No direct or indirect financing is offered to the franchisee. The franchisor does not guarantee the franchisee’s note lease or obligation. Franchisees of the Domino's Pizza system are eligible for expedited and streamlined SBA loan processing through the SBA's Franchise Registry Program."
This company produces gobs of free cash flow due to the low CAPEX needs emanating from the business model. Last quarter, FCF was $124MM and of course they have a dividend and share buy back program in place.
Still think 32X NTM EPS is expensive? I think the Domino's story remains strong. The international opportunity remains and with a proven business model, Domino's could continue to surprise the Street. Stay bullish...
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