Hi there,
I think long-term, Dominos will be just fine and in fact, pizza stocks are usually good stocks to hold in recessions - especially as food prices soar. It is much chapter to grab a pizza than have a sit down meal at a restaurant. That said, the latest quarterly results provided some insights into current headwinds. For example, higher input prices due to inflation lead to higher prices and subsequently lower growth. Most growth came from net new stores and in the U.S., same-store sales growth came in at only 0.8%. Importantly, the company lowered guidance...but not just near-term guidance, mid-term guidance as well.
Domino's now expects 2-3YR sales growth of 6% (at the midpoint) down from 8% and also lowered same-store growth to 6%. The issue with delivery has been persisting for the better part of the year as well. This is a big headwind for the company since it can't find enough drivers to meet demand.
On the bright side, it did announce a 10% increase to the quarterly dividend. The company has a very strong payout ratio as the dividend accounts for only 40% of FCF and 35% of net income.
Is the company cheap here? Against historical valuations it very much is...at around a 30% discount. That said, with slowing growth those numbers will have to adjust. Today, the company is trading at approximately 24x earnings and 23x forward earnings. That said, it is also trading at a discount to most of its competitors and industry averages across pretty much all valuation metrics. From that perspective it does look good - i just question if the entire industry isn't a little inflated at the moment.
All that said, I like Domino's for the long term but it needs to figure out labor issues as it would perform better if it can find a solution. Today, about half the orders (40% in the US) are now carry out. Here are some additional insights on the issues from the quarterly conference call:
"First, as consumers returned to many of their pre-COVID eating habits, some of the sit-down business that was a source of volume for restaurant delivery orders returned to that channel. Second, inflation impacted delivery due to the added expenses of fees and tips in that channel. Our research shows that a relatively higher delivery cost during inflationary times leads some customers to prepare meals at home instead of getting them delivered. We believe this dynamic will continue to pressure the delivery category in the short term, as long as consumers' disposable income remains pressured by macroeconomic factors."
Mat