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DOMINO'S (DPZ) LONG THESIS:
- Buying Into The Concerns: We are going long DPZ at a time when there is as much controversy as I can remember in 10 years. There is even more controversy than when DASH and the other 3-P providers were spending aggressively to acquire delivery market share. What has not changed about the DPZ story is its strong business models that consistently provide consistent margins and very high returns. The slowdown in SSS in the USA began in 3Q21 and 4Q21 for the international segment. The slowdown in sales can be attributed to external factors, not product quality. The external factors will self-correct in 1H23, leading to better stock price performance.
- A Unique Value Proposition: Dominos provides value to consumers and shareholders in many ways. Whether it is brand reputation, brand building, accessibility, supply chain, etc., there are many platforms in which Domino’s is undoubtedly growing its value proposition - Brand Building/Reputation; Supply Chain; International Reach; Ease and Accessibility, and Innovation. Lastly, the carryout Mix & Match Deal menu at $6.99 per item is a great value proposition for struggling consumers.
- Valuation/Performance Reflect On The Negative: DPZ traded +10.4% following DPZ's 3Q22 print, with SSS outperforming; revenue in-line, but EPS missed by (6%). With the stock down 40% YTD (underperforming the S&P 500 by 21%), the concerns are well known, but incremental fundamental improvements are not priced in. Despite the stock's positive response on the earnings day, the sell-side tended to come away from the earnings print mixed, focusing on the persistent inflation/margin headwinds that led to the EPS miss. DPZ is an excellent business trading at the lower end of its five years historical range.
CMG Tuesday
Incentive comp driving decisions on price?
Knapp is reporting that Fast Casual SSS was 5.3% (traffic -2.1) in September, improving from 4.0% (traffic -3.4%) in August and 3.0% in July (traffic -5.1%). This brings 3Q22 Fast casual SSS to 4.1% with CMG SSS estimates for 3Q22 Comps are +7.3% vs. guidance in the mid to high-single digits; Revenue $2.23B; Food, beverage, and packaging 30.1%; Restaurant margin 25.1%. EPS is $9.19, and the number of ending restaurants is 3,107. Why will comps accelerate in 4Q22 to +8.1%? Is the company raising prices again? As we published the other day, traffic is slowing for CMG. Why now? Is the consumer starting to react to the aggressive pricing by the company?
The C-suite wants to drive SSS and margins higher for millions of reasons. In 2019, CMG granted PSUs to its executive officers that were earned based on the company’s three-year CRS (SSS) growth and three-year average RCF margin, measured from January 1, 2019 – December 31, 2021. Today's performance objectives for the 2021 PSUs are based on the company’s three-year CRS growth, measured from January 1, 2021 – December 31, 2023, and two-year average RCF margin, measured from January 1, 2022 – December 31, 2023. The company's senior management has all the incentives needed to protect margins in a hyperinflation environment by raising prices. We will see what the consequences of this strategy are in FY2023.
MCD
The popularity of McDonald’s adult Happy Meals is off the charts.
From Civic Science - "If you’re half as good at marketing as the folks under the golden arches, consider yourself blessed because they play a different game than everyone else. In our trend-tracking models, we consider any product where intent and usage are 1-to-1 a winner with a big upside. Well, adult Happy Meals (no, they don’t have Tito’s and edibles in them) are currently running at nearly 3 (intent) to 1 (usage). That’s just silly. The biggest predictor of interest in the product is whether people regularly got Happy Meals as a kid, which confirms the incredible, unmatched lifetime value of Mickey D’s brand."
