Is Domino's Pizza Inc a good investment?

Domino’s Pizza Inc shareholders have been massively rewarded over the past decade or so.

Can the company continue to deliver?

Many of us would have heard of Domino’s Pizza before but did you know that Domino’s has also been a great stock to own?

As the leading global quick-service restaurant in the pizza category, the share price of Domino’s Pizza Inc has increased a phenomenal 2600 per cent from 2004, easily outpacing the S&P 500 in the US.

Here are some of my thoughts on this amazing company.

A capital-light business model

Just to make sure we are on the same page, the Domino’s I am referring to is the brand owner that is listed on the New York Stock Exchange.

There are other Domino’s Pizza franchisees that are the master franchisees in different countries. These companies are also listed on their respective exchanges.

Domino’s the brand owner derives its revenue from (1) royalties and fees it charges its franchisees, (2) providing the supply chain to its restaurants, and (3) franchise advertising.

Most of Domino’s restaurants are franchised outlets so the company has very little capital outlay requirements.

The company spent only US$85 million (S$120 million) in capital expenditures in 2019, while raking in US$496.9 million in operating cash flow.

This capital-light business means that most of the company’s cash flow from operations can be returned to shareholders either through share buybacks or dividends.

Strong track record of growth

Domino’s has a steady track record of growing its business. Same-store sales in the US has increased in 35 consecutive quarters, since 2010, at an average pace of 6.9 per cent.

More impressively, same-store sales in its international stores have increased for 104 consecutive quarters.

The charts below show same-store sales growth since 1997:

On top of that, the number of Domino’s stores has grown considerably over the years.

Today there are over 17,000 stores in more than 90 markets worldwide. Net store numbers increased by more than 1000 each year from 2016 to 2019.

Increase in net store numbers and same-store sales growth have ultimately translated into healthy revenue growth for Domino’s. The chart below shows the global retail sales growth from 2012 to 2019.

A resilient business model

The Covid-19 pandemic has demonstrated the resilience of Domino’s business.

Domino’s United States business has actually improved during the current lockdown in many parts of the US.

Same-store sales in the US were up 7.1 per cent in the first four weeks of the second quarter of 2020, and US retail sales were up 10.7 per cent over that same period.

Internationally, Domino’s business has also done better than most.

Despite many of its international stores being temporarily closed or having some operating restrictions, international retail sales were still down only 13.2 per cent during the first 3 weeks of the second quarter.

These are impressive figures and highlights that Domino’s has the ability to keep raking in the money even in a difficult operating climate.

Potential for more growth

Although Domino’s 17,000+ store count may seem like a lot, there’s still a large market opportunity for more growth.

Domino’s currently has 6,126 stores in the US and 10,894 stores internationally. The company believes that the US market can accommodate 8,000 stores, which means Domino’s can open another 1,800+ stores in the US alone.

On top of that, its 15 largest international markets have the potential for another 5,500+ stores.

The chart below shows Domino’s estimates of where their expansion opportunities lie internationally.

Domino’s is targeting to have 25,000 stores worldwide and US$25 billion in annual global retail sales by 2025. That’s a 47 per cent increase in store count and a 71 per cent growth from 2019’s revenue.

The risks

Domino’s is not perfect though. The company has the unwanted distinction of having negative shareholder equity.

That’s because the company has been returning more cash to shareholders than what it rakes in each year. It is tapping aggressively into the debt market to finance its share buybacks and dividends.

Management believes that its resilient business model, steady cash flows and capital-light business enables it to function well with leverage.

While I agree, I still think that the company could be a little bit more conservative to prepare itself against unforeseen circumstances.

As of 22 March 2020, Domino’s had US$389 million in cash and restricted cash, and a staggering US$4 billion in debt. It had negative shareholder equity of US$3.4 billion.

If Domino’s has an extended period of disruption to its business, it may end up running into liquidity issues.

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Final words

There is much to admire about Domino’s Pizza Inc.

It has an admirable track record of growth and still has room to grow into.

On top of that, its capital-light and resilient business model enables the company to continually reward shareholders with dividends and share buybacks.

However, the company is not perfect and its highly-leveraged balance sheet poses some risk. Even though I think Domino Pizza Inc can provide shareholders with good returns, investors should still proceed with caution.

This article was first published in The Good Investors. All content is displayed for general information purposes only and does not constitute professional financial advice.