Domino's Pizza: Solid Company, Bad Price
Summary
- Increasing consumer food delivery services will continue to put pressure on Domino's.
- Domino's slowing growth rates are likely to continue going forward.
- Domino's trades at substantially higher multiples than its peers, but no longer has the growth rates to support such high multiples.
Shares of Domino's Pizza (NYSE:DPZ) rallied after the company reported a GAAP EPS beat of $0.15 and a revenue beat of $20M for Q4 2019. Q4 marked the 104th consecutive quarter of international same store sales growth (nearly nine years) and the 35th consecutive quarter of U.S. same-store sales growth. While these are impressive numbers that indicate management knows what they're doing, the stock remains elevated at $338 per share. This puts shares over 35 times TTM earnings, and over 30 times expected 2020 earnings. leading me to believe that shares are too expensive for this company.
Source: Domino's History
Source: Domino's Pizza Fourth Quarter and Fiscal 2019 Financial Results Press Release
Delivery in Decline, Popularity in Pickup
For years, pizza was the classic delivery option. Domino's only had to compete with other pizza restaurants in the delivery game. The last few years, however, have seen multiple food delivery services pop up that allow for virtually any food a customer wants to be delivered straight to their door. This brings the competition for Domino's up substantially and will continue to do so indefinitely going forward, as these food delivery services are, in my opinion, here to stay.
Domino's has recognized this and thus has pivoted to a new option for customers. Pick up in-store, aka carryout. Domino's has strategically located stores to be close to consumers, making it easy for a customer to order online and pick up themselves rather than have it delivered. The company is in the process of rolling out technology to help with this, such as Pie Pass, which is supposed to make the carryout experience more efficient and consumer focused. This has had real, measurably positive results so far, as carryout order count increased 8.1% across the U.S. in total and 3.9% on a same-store basis in Q4 2019.
Ultimately, any decline in delivery looks like it may be made up for with an increase in carryout. I myself have ordered the carryout option virtually every time. The decline in delivery should not be ignored, just monitored. It has been a key differentiator and competitive advantage for pizza places in the past that no longer exists going forward.
Slowing Growth On Multiple Fronts
Domino's continues to add to its store numbers. In total, 1,106 net new stores opened in 2019 across the globe but this marked a slow down percentage-wise to just 6.95% growth in store count, down from more than 10% in 2016. Domino's store count runway remains significant. I continue to think they will be able to add 1,000-plus net new stores per year for the foreseeable future, as quick service restaurants like Starbucks (SBUX) and McDonald's (MCD) have well over 30,000 stores. The growth rate will, however, likely be a declining percentage of total stores for the foreseeable future.
Source: Domino's Pizza Fourth Quarter and Fiscal 2019 Financial Results Press Release
| Year | 2019 | 2018 | 2017 | 2016 |
| Store Count | 17020 | 15914 | 14856 | 13811 |
| Number of new stores | 1106 | 1058 | 1045 | 1281 |
| Growth Rate | 6.95% | 7.12% | 7.57% | 10.22% |
Source: Data from Domino's 2019 10-K SEC Filing
Source: TIKR.com
The store count growth rate is not the only declining growth rate. Revenue and EPS both saw substantial growth rate declines in 2019. Analysts are projecting single-digit percentage revenue growth for each of the next four years, And I'm inclined to agree with them.
Source: Seeking Alpha
Domino's Valuation Seems Stretched
Domino's is a well-managed company and I don't believe they've hit peak store count, but at over 30 times 2020 EPS estimates, it appears to be an awfully high valuation considering the slowdown in growth. Comparing Domino's to Papa John's (PZZA) is favorable on a forward PE basis, but not so much on EV to EBITDA. Domino's also is trading at higher multiples than Yum Brands (YUM), which owns Pizza Hut. Other categories of QSRs also trade lower on both a forward PE ratio and forward EV to EBITDA basis.
Data by YCharts
Data by YChartsI'd be more interested in owning Domino's at a forward PE in the mid to low 20s. This would be more on par with other QSRs, and would seem to fit the company's projected growth rates better. The consensus 2020 EPS estimate currently sits at $11.05, thus shares would only get interesting for me between $221 and $276 per share (20 and 25 times consensus EPS respectively).
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