DPZ Takeaways
I definitely some got some thoughtful push back on the incrementality of the UBER Eats partnership. We will have more thoughts on DPZ and PZZA in the upcoming Pizza Segment Black Book.
DPZ is Tapping into New Marketplaces and Upgraded Loyalty Program Innovation
- Efforts are being made to restore delivery growth in the US through improved service, staffing, and innovation.
- Domino's has partnered with UBER Eats to tap into the aggregator marketplace, aiming for $1 billion in incremental sales. Importantly, DPZ will receive all the data necessary to analyze the incrementality of the platform including including important customer details. The partnership with UBER provides an opportunity for higher income, premium-priced channel targeting.
- Launching a new and improved loyalty program in September 2023 to retain and reward customers. The loyalty program will offer better value and engagement for customers and franchisees. The company maintains a transaction-based loyalty program, allowing lower-level transactions to drive order counts.
- Another innovations coming in 3Q23: Domino's Pinpoint Delivery, allowing orders nearly anywhere.
- The go-forward plan includes driving sales, tapping into incremental marketplaces, new loyalty and providing best-in-class service.
- The momentum is expected to impact business performance in 2024 and drive continued EBITDA growth for franchisees.
Pricing lagging the competition, Margin Recovery, and Global Growth Outlook in 2024
- 2Q23 pricing increase across the US system was 3.9%, expected to be similar in the third quarter and moderate to approximately 2% in the fourth quarter.
- Cost efficiencies led to a 240 bps YoY improvement in Operating Margin, aiming to reach or exceed 2019 levels for the full-year 2023.
- Positive same-store sales growth in the US and international businesses for the third consecutive quarter contributed to operating income improvement.
- Global retail sales grew 5.8%, excluding foreign currency impact; continues solid performance in the US carryout business while challenges continues in the delivery segment.
- The unit count increased by 27 net new stores in the US and 170 net new stores internationally.
- US franchise store profitability is on track to reach at least $150,000 in 2023.
- Global retail sales growth is expected to track between the low end and midpoint of the two to three-year outlook of 4% to 8%.
- Global unit growth is expected to track to the low end of the two to three-year outlook of 5% to 7%.
- A debt leverage ratio of 4-6x is appropriate for the company, while free cash flow will be used for investments, shareholder returns, and debt retirement when suitable.
CMG What to expect
The street widely expects the company to beat sales, comp and EPS growth for the quarter.
- Chipotle's 2Q23 will likely beat sales growth of 14.4% YoY, reaching $2.532 billion, with comp sales growing 7.5% after posting 10.9% in 1Q23.
- Street is expecting 2Q23 SSS well above 8%. For reference in 2Q23 Placer.AI traffic was up 16% after being up 22%in 1Q23 and only 1.6% in 4Q22
- Restaurant-level margin will increased by approximately 201 basis points YoY to 27.3%, benefiting from pricing, labor efficiencies, and lower avocado prices.
- EPS is estimated to be $12.31, representing 32% YoY growth down from 84% YoY growth in 1Q23. I’m estimating $12.40 for
- Cost of sales growth of 10% YoY, driven by menu price increases and lower avocado prices, partially offset by higher prices for certain items.
- Labor costs decreased by about 100 basis points from last year, benefiting from sales leverage but partially offset by wage inflation.
- Marketing and promo costs were expected to step down to the mid 2% range in 2Q23.
- 2Q23 operating profit is estimated to be $459 million up up 33.2% YoY producing an operating margins of 17.8% up 203bps YoY
- Chipotle will end the quarter with over $1.6 billion in cash and investments and no debt.
- Estimates of 58 new restaurants were opened in 2Q23 versus 41in 1Q23 leaving the company to open 155 in 2H23 to hit the low end of the target of between 255 and 285 new restaurants in 2023. The only company opened 85 in 2H22 (97 in 2H21), suggesting that the company will miss unit openings in 2023 by 50 units!
Notable commentary from 1Q23
- The company's focus on running successful restaurants with exceptional food and people is driving performance.
- New menu innovations, such as the Fajita Quesadilla and Chicken al Pastor, contributed to the positive results in 1Q23
- Chipotle's technology and innovation efforts are improving the guest experience and driving engagement in the Rewards program.
- The company is expanding access and convenience with new restaurant openings, including Chipotlanes, and partnerships with food delivery networks.
- Important commentary to drive thru put "Chipotle's commitment to developing and retaining diverse talent at all levels is exemplified by inspiring stories of long-term employees who started as crew members and progressed within the organization.
Since the beginning of the year the stock is up 50% revenue estimates up 0.3%; EBITDA up 2.5% and EPS up 4%. sine 12/31/22 NTM EV/EBITDA has gone from 21.8x time to 28.2x
TOST
I don't fully understand why Restaurant operators want to be on the hook for higher TECH costs, yet push back on delivery fees?
Restaurant operators wanted the removal of Toast's 99-cent online ordering fee, but the company still faces financial challenges. Post-COVID, restaurant tech companies are experiencing difficulties as they try to balance slowing growth with economic realities rising costs. Toast went public in 2021 and might be EBITDA breakeven in 2023 with a significant acceleration in profitability in 2024. The stock is down 60% from the IPO. To address its profitability issues, TOST introduced an order processing fee for online transactions over $10. However, restaurants strongly opposed this move, and the fee was quickly removed due to the uproar from operators. While restaurants appreciated the decision, the stock headed lower, as someone (like the company) still had to cover the costs. Toast's CEO acknowledged the need for investment in innovation but assured that the company would adjust pricing thoughtfully to fund product development without resorting to broad-based price increases. However, R&D costs are significant for companies like Toast and OLO, and investors are becoming less willing to subsidize these expenses. With investors losing their appetite for funding costly tech ventures, mistakes like the ill-advised fee may be passed on to restaurants through higher prices. Surprisingly, restaurants prefer absorbing these costs rather than passing them on to their customers in an increasingly digital age.
