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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.
