Pizza Powerhouse Plots Path to Rampant U.K. Expansion
Our position is LONG on DOM-GB and SHORT on PZZA, primarily due to the challenges in PZZA's recently acquired U.K. business. The insights gained from the DOM-GB investor meeting have reinforced our confidence in this strategic positioning.
CEO Andrew Rennie held the call to provide an update after his first 100 days leading Domino's Pizza Group (DOM-GB). His key priorities are delivering Value to customers, franchisees, and shareholders by driving long-term sustainable growth. He has 30 years of experience in the pizza industry, ten as a Domino's franchisee. He appears to understand and align with franchisees. He comes across as passionate about growth, which he sees as the key to success—inspired by second-generation franchisees who want to grow the business.
- State of the Business: High-quality franchisees who are profitable, have strong balance sheets, and have a considerable appetite to grow more stores. A strong leadership team and supply chain/digital systems are needed to support growth. There is significant room to grow, with only 25 years in the U.K. market versus 63 years in the U.S. Competitors are much smaller.
- Priorities: Leveraging existing platform to drive organic growth in the U.K./Ireland. Increasing focus on operations and fundamentals and enhancing value proposition with a loyalty program, menu innovation, and improved customer awareness, accelerating store openings to get closer to customers and aiming for a 50% pickup mix.
- Additional Growth Areas: Consolidating corporate stores and J.V.s for more control and better returns and potentially acquiring an established second brand that meets strict criteria—entering other Domino's markets with teams and infrastructure in place.
Focus On Driving Organic Growth in the U.K.
- Leveraging existing infrastructure: This includes their distribution network, supply chain, commissary facilities, and digital systems, which provide a scalable foundation for growth.
- Increasing operational focus: Getting "back to basics" on service times, quality, and execution to improve customer experience. Running incentive programs with franchisees.
- Enhancing value proposition: Testing and rolling out improvements like a loyalty program, menu innovation for different dayparts like lunch, and maintaining strong value perception.
- Accelerating store openings: Opening more stores through splits of existing territories and expanding into new regions to increase proximity and better serve more customers.
- Driving collection growth: Collection has higher profit margins, and Domino's sees room to grow it from 37% to 50%+ over time. New stores in better locations will help.
The Plan to Enhance Domino's Value Proposition to Drive Organic Growth:
- Loyalty Program: Will test in Q1 2023, with two additional stages over the next 1-2 years. The goal is to increase customer frequency/spending through incentives. The model will be tailored for the U.K. market based on research. It has the potential for customer segmentation and personalized offers.
- Menu Innovation: Specifically called out expanding into other dayparts like lunch. New products to serve different meal occasions. It gives customers more choices and reasons to visit.
- Customer Awareness/Consideration: Metrics peaked recently, showing momentum. Opportunities remain to capture more consumption occasions. Aggregator partnerships will expose Domino's to new audiences.
- Compelling Value Overall: Not just discounts but the whole experience - quality, taste, service speed. Proximity through more stores powers perception. 14M existing customers signal substantial Value being provided. So, enhancements that incentivize purchase frequency expand daypart occasions, raise brand profile, and underscore existing value elements.
The Competition
He mentioned that Domino's Pizza Group has about 6-7x the sales of their nearest competitor in the U.K. pizza market, and the goal is to expand this lead to 10-12 times larger. When asked if the pizza market is saturated, he responded that the Domino's brand has been around for 63 years in the U.S. and continues growing. The U.K. market still has a long runway, only being about 25 years old. He said the most significant opportunity is improving their operations and customer experience rather than focusing heavily on competitors. They can rapidly scale in the U.K. by growing customers and stores.
Some additional details on Aggregators and the related opportunity
Andrew was asked what percentage of the aggregator pizza market Domino's could capture from competitors. He admitted: "I don't know the answer to that." He views aggregators as "a net add for us" and an "incremental customer" that Domino's does not currently have. Their research shows that 88% of aggregator orders are also incremental. Domino's will start testing with Uber Eats in 1Q24 to get more data on consumer behavior through the channel. They have studied Domino's U.S. experience closely, including reviewing any mistakes/learnings to apply for the U.K. market opportunity. He believes enhancing Domino's value proposition with loyalty and menu innovation can attract new customers from within and outside the existing pizza market. In this sense, aggregators are another access point. In summary, significant unknowns still exist on aggregator upside potential. Still, they are leaning in with tests underway, viewing it as an incremental business that provides exposure to new consumer audiences and stimulates growth by improving their value proposition.
Nosh & Tipple Tops as Budget Bites are strong
DRI is a LONG BIAS
Darden Restaurants' 2Q24 performance stands out in a challenging industry landscape. Despite broader market slowdowns, the company's results are decidedly bullish. Key highlights include robust, broad-based performance and notable traffic gains, contributing to an upward revision in their outlook. The company's operational momentum and leading position in sales growth bolster confidence for FY24. Increasing customer traffic, particularly when many competitors are experiencing declines, is a leading indicator. Both Olive Garden and Longhorn have demonstrated the strength of Darden's core brands despite minor headwinds from the fine dining segment. The resilience in traffic trends and margin expansion further solidifies this optimistic view. Darden Restaurants reported robust 2Q24 results, surpassing industry benchmarks in same-restaurant sales growth and traffic. Total sales surged by 9.7% to 2.7 billion, fueled by the integration of Ruth's Chris restaurants and new openings. Same-restaurant sales saw a 2.8% increase, significantly outperforming industry averages, driven by higher guest traffic and a favorable mix shift. All brands achieved record levels of guest satisfaction. Adjusted diluted EPS rose by 21% to 1.84. Reflecting these strong results, the company has revised its full-year outlook, now projecting an adjusted diluted EPS in the range of 8.75 to 8.90.
Key Financial Highlights
- Same-restaurant sales were up 2.8%, exceeding the industry by 410 bps.
- Guest traffic outpaced the industry benchmark by 370 bps.
- Total sales rose 9.7% to 2.7 billion.
- Adjusted restaurant-level EBITDA margin expanded 230 bps to 18.8%.
- Adjusted diluted EPS increased 21% to 1.84.
- Returning 340 million to shareholders via dividends and buybacks.
- Raised full-year adjusted diluted EPS outlook to 8.75 - 8.90.
Brand Performance
- Olive Garden: Total sales were up 6.3%, same-restaurant sales rose 4.1%, outpacing industry by 540 bps. Guest traffic was flat versus an industry decline of 4.8%. Never Ending Pasta Bowl demand was strong.
- LongHorn Steakhouse: Total sales climbed 7.1%, and same-restaurant sales grew 4.9%, exceeding the industry by 620 bps. They have maintained a #1 ranking in casual dining.
- Fine Dining: Sales increased with additional Ruth's Chris units, but Capital Grille and Eddie V's saw negative same-restaurant sales amid a challenged environment.
Rising with the Sun: Unveiling the New Dawn of Breakfast Trends in 2023
Circana™, previously known as IRI and The NPD Group, has unearthed intriguing trends in consumer behavior, particularly a heightened inclination towards specialty coffee, teas, and donuts, coinciding with the return of many employees to office environments.
In Circana's latest 2023 analysis, a notable uptick of 4% in restaurant breakfast patronage was observed, predominantly midweek - Tuesday to Thursday. This surge aligns closely with the rhythms of office commuting. A standout demographic in this trend is men within the 45-54 age bracket, who are in the higher income echelons. Their spending on morning meals is quintuple the norm, with a pronounced inclination towards caffeinated beverages and quick, easy-to-consume food options. Meanwhile, the younger Gen Z crowd, aged 18-24, gravitates more towards breakfast outings. Their preferences skew towards unique, specialty drinks, yet they opt for more wallet-friendly establishments. Intriguingly, while only a fifth of U.S. consumers purchase breakfast from restaurants, this segment accounts for 60% of the sector's sales. This pattern underscores a significant migration from retail purchases to dining out for breakfast. Circana's report points to potential retail avenues, particularly in ready-to-drink caffeinated
This burgeoning interest in gourmet offerings is not merely reflected in foot traffic and consumption metrics. Still, it is also mirrored in the rapid expansion of quick-service outlets proffering these products. Gourmet coffee and tea shops are at the forefront, with an astounding addition of 3,500 new locations in March 2023, starkly contrasting to the previous year, as retailers respond to the escalating consumer appetite. (Knowing this, we wonder: Is MCD CosMc's recent launch behind the curve?)
Circana's senior vice president and industry advisor for Food and Foodservice, David Portalatin, observes, "There's a discernible uptick in the allure of these specialty items. Consumers increasingly gravitate towards on-the-go beverages and snacks, particularly as they reacquaint themselves with their morning rituals." He adds, "With more employees transitioning back to office life post-pandemic and the onset of autumn, gourmet coffee, tea, and donuts are becoming synonymous with indulgence and convenience or the time-pressed consumer."
