Company Reports

With an 85% digital sales mix, a strong loyalty program, and a quickly growing carryout business, Domino's looks well positioned to navigate a turbulent industry environment. While a shift toward carryout and dine-in options has weighed on recent results, the firm has taken 210 basis points of market share in the quick-service restaurant, or QSR, pizza category since 2018, seeing its share of global sales swell to 20.2% in 2023, according to Euromonitor data and our calculations. While we expect a challenging couple of quarters, with evidence of consumer trade-down and declining industrywide traffic, we view the firm's long-term emphasis on defending franchisee profits, supporting its growing carryout business, strengthening its tech infrastructure, and building store density at the market level (fortressing) as prudent.

We’re encouraged by wide-moat Domino’s first-quarter results, with the operator enjoying strong same-store sales growth of 5.6% in its home market, materially topping our 1% estimate. It had looked to us like the firm’s first quarter would be its weakest of the year given the challenging industry backdrop, so it was great to see 3.8% growth in comparable transactions, by our estimates and excluding the firm’s Uber Eats partnership (1.4% of sales, 67% incremental). Management left its full-year guidance largely unchanged despite that outperformance, with a cocktail of factors, from normalizing digital services fees to increasing investments and higher food cost inflation likely to drive margin normalization over the balance of the year. Nevertheless, the traction Domino’s has enjoyed from its loyalty program refresh and its partnership with Uber Eats should provide durable sales growth tailwinds. After digesting results, we plan to raise our $400 fair value estimate by a mid-single-digit percentage, though shares still look pricey at current levels.

As we gear up for the release of first-quarter earnings, our top picks in the restaurant industry remain wide-moat McDonald's and wide-moat Starbucks, trading at 14% and 19% discounts to our $312 and $105 fair value estimates, respectively. While industry traffic has been depressed for two years, both brands boast strong digital platforms that allow them to defend transaction frequency without indiscriminate national discounting, and both benefit from scale-driven cost advantages that should allow them to meet the needs of the increasingly value-sensitive consumer without sacrificing financial performance. These are the two most important factors, in our view, that will distinguish the best and worst performers in our industry coverage over the coming years. The industry looks fairly priced in aggregate, trading at a 3% premium to our market-cap weighted fair value estimates. The aggregate figure masks a very bimodal return distribution: Brands like narrow-moat Wingstop (up 108% annually) and wide-moat Chipotle (74%)—which boast strong unit economics and have taken material industry transaction share—have materially outperformed brands like no-moat Wendy's (down 9%) and narrow-moat Papa John's (down 17%), which have not. Those top-performing brands are fully priced, trading at material premiums to our intrinsic valuation (163% and 52%, respectively), suggestive of meaningful execution risk.

With an 85% digital sales mix, a strong loyalty program, and a quickly growing carryout business, Domino's looks well positioned to navigate a turbulent industry environment. While a shift toward carryout and dine-in options has weighed on recent results, the firm has taken 210 basis points of market share in the quick-service restaurant, or QSR, pizza category since 2018, seeing its share of global sales swell to 20.2% in 2023, according to Euromonitor data and our calculations. While we expect a challenging couple of quarters, with evidence of consumer trade-down and declining industrywide traffic, we view the firm's long-term emphasis on defending franchisee profits, supporting its growing carryout business, strengthening its tech infrastructure, and building store density at the market level (fortressing) as prudent.

Wide-moat Domino's remains positioned to outperform the broader US restaurant industry in a value-sensitive environment, but we think the shares are currently unappetizing for investment. We expect only modest changes to our 2024 expectations for $4.67 billion in sales (up 1%) and $15.98 in earnings per share (down 3%) after digesting fourth-quarter earnings and plan a low-single-digit percentage increase in our $387 fair value estimate after incorporating the impact of time value.

As we survey the U.S. restaurant landscape looking toward 2024, the largest, chained restaurants with durable cost advantages look best positioned to outperform. We expect industry growth to remain low—just 1.3% annually in real terms through 2025, versus a long-term average of 2.5%. The sharp slowdown is predominantly attributable to slowing consumption spending, with pressured U.S. consumers already limiting restaurants’ ability to further increase prices and likely driving an uptick in industry promotional activity.

With an 85% digital sales mix, a strong loyalty program, and a quickly growing carryout business, Domino's looks well positioned to navigate a turbulent industry environment. While the reopening of dine-in options has weighed on recent results, the firm has taken 220 basis points of market share in the quick-service restaurant, or QSR, pizza category since 2019, seeing its share of global sales swell to 20.6% in 2022, according to Euromonitor data and our calculations. While we expect a challenging couple of quarters, with evidence of consumer trade-down and declining industrywide traffic, we view the firm's long-term emphasis on defending franchisee profits, supporting its growing carryout business, stregthening its tech infrastructure, and building store density at the market level (fortressing) as prudent.

Wide-moat Domino's investor day did little to move the needle on our forecasts for the global pizza leader. The company's investments in its loyalty program, carryout ordering experience, and standardizing its tech stack across a sprawling international footprint are cogent and should allow the leading quick-service pizza restaurateur to continue to capture market share within the pizza category. That said, management's 2024-28 guidance for 7% annual systemwide sales largely aligned with our prior 6.8% forecast, and its conservative target for 1,100 or more annual net new units actually fell slightly behind our estimates, which we expect to maintain, as the firm's compelling three-year payback periods should allow it to comfortably outperform its development benchmark. On balance, as we mull over management's presentations and revised midterm guidance, we don't expect to change our $387 fair value estimate, leaving shares trading in a range we'd consider fairly priced.

With an 80% digital sales mix, a strong loyalty program, and a quickly growing carryout business, Domino's looks well positioned to navigate a turbulent industry environment. While the reopening of dine-in options has weighed on recent results, the firm has taken 220 basis points of market share in the quick-service restaurant, or QSR, pizza category since 2019, seeing its share of global sales swell to 20.6% in 2022, according to Euromonitor data and our calculations. While we expect a challenging couple of quarters, with evidence of consumer trade-down and declining industrywide traffic, we view the firm's long-term emphasis on defending franchisee profits, supporting its growing carryout business, and building store density at the market level (fortressing) as prudent.

Wide-moat Domino’s posted solid third-quarter results, with $1.03 billion in sales and $4.18 in diluted EPS ($3.20 when excluding a non-cash gain on investment and differential tax rates) edging our $1.01 billion and $3.11 estimates, respectively. While unit growth of 1.8% in the U.S. and 4.3% in the firm’s international segment fell slightly short of our 1.8% and 5.5% respective forecasts, this was largely reflective of the disaggregation of Domino’s 143 Russian stores; underlying international segment growth of 5.9% and roughly 1,000 annual gross store openings are consistent with the firm’s development cadence over the past few years. On balance, we expect to lower our $397 fair value estimate by a low-single-digit percentage as we balance the impact of time value, the development shortfall, softer-than-expected company-owned store margins, and a slightly more positive outlook for fiscal 2024.

The restaurant industry looks cheap to us for the first time since fall 2022, with the recent market correction creating a buying opportunity for long-term investors. Our coverage trades at a 7% cap-weighted discount to our intrinsic valuations, with wide-moat companies like Yum Brands, Starbucks, and McDonald's looking unusually alluring, each trading at a 10%-12% discount to our respective $139, $103, and $285 fair value estimates. We recognize that slowing same-store sales pose a near-term risk, but believe that large, quick-service operators with scale-driven cost advantages and strong digital touchpoints look poised to capture market share in this dynamic environment. Restaurants are more resilient than many investors realize, with companies that outperform on the basis of "value for the money" like McDonald's and wide-moat Chipotle even posting comparable-store sales growth over the course of the 2007-09 downturn. While we expect consumer spending to slow in 2024, we continue to maintain that the U.S. will avoid an outright recession and believe that investors seeking consumer cyclical exposure would do well to consider turning toward the restaurant industry at current prices.

Industry changes espoused by COVID-19 changed little for digital-leader Domino's, which already profited from a 70% digital sales mix, boasted a robust loyalty program, and maintained proprietary e-commerce and point-of-sale platforms. While the reopening of dine-in options has weighed on recent results, the firm has taken 220 basis points of market share in the quick-service restaurant, or QSR, pizza category since 2019, seeing its share of global sales swell to 20.6% in 2022, according to Euromonitor data and our calculations. While we expect a turbulent couple of quarters, with evidence of consumer trade-down and declining industrywide traffic, we view the firm's long-term emphasis on defending franchisee profits, supporting its growing carryout business, and building store density at the market level (fortressing) as prudent.

We believe wide-moat Domino's second-quarter key narrative ties to improving restaurant-level profitability and flow-through implications for a recovery in unit development, not the firm's broadly publicized deal with third-party delivery provider Uber Eats. To this effect, the pizza chain saw its company-owned restaurant margins improve materially, swelling 220 basis points to 18.6% from 16.4% in the year-ago period as food costs proved deflationary, while management guided to about an 8% annual increase in franchisee EBITDA in the U.S. (to $150,000 per store) for the full year. As a consequence, we believe that Domino's should be able to drive unit growth closer to the midpoint of its 5%-7% target in 2024 (up from our prior low-5% expectation), with a strong correlation between franchisee EBITDA and willingness to invest in new stores. As we digest results, we plan to incorporate a modest bump from the firm's Uber Eats agreement—a 1.4% cumulative lift to same-store sales over the next half decade—and a much quicker recovery to high-teens restaurant margins, raising our 2023 forecast for company-owned restaurant EBITDA margin to 18.2% from 16.1% as the firm's food basket saw a 2.4% decline in annual pricing. The net effect is a planned low-single-digit percentage increase to our $385 fair value estimate, leaving shares trading in a range we'd consider fairly valued.

Restaurant stocks look expensive as we take the industry's pulse, with names in our coverage trading at a market-cap-weighted 10% premium to our intrinsic valuations. While demand has held up nicely to date, we're seeing weak spots, with persistent declines in traffic and items per check suggesting price-conscious consumers and a more challenging pricing environment to come. Nominal same-store sales growth remains healthy, up around 5.7% industrywide over the past three months (RMS data), but traffic (down 1.4%) and items per check (down 3.7%) remain points of concern. We expect slowing sales momentum into the first half of 2024, resulting in a more promotional environment for the industry and a three- to four-year route to normalized restaurant-level profitability. The industry's bargain bin looks sparse, but we see modest upside in Wendy's and Starbucks shares, which trade at 6% and 2% discounts to our $23 and $104 fair value estimates, respectively.

Wide-moat Domino's announced a partnership with narrow-moat Uber this morning to offer the pizza chain's fare to Uber Eats customers globally. With our assessment that customer overlap between delivery aggregators and the value-oriented chain is limited, in tandem with Uber Eats' relatively small share of food delivery in the firm's largest U.S. markets (23% in February of this year, according to Statista data), we don't expect the decision to prove transformational, and consequently don't expect to move our $385 fair value estimate meaningfully. Shares shot up roughly 11% in intraday trading, bringing the stock, which has long been our top restaurant pick, into a range we'd consider fairly valued.

COVID-19 drove sweeping changes across the restaurant industry, with operators scrambling to provide delivery integration, build out e-commerce platforms, and pivot to digital-driven models. For Domino's, which had already implemented the lion share of these initiatives, very little has changed. While the reopening of dine-in options has weighed on recent results, the firm has taken 220 basis points of market share in the quick-service restaurant, or QSR, pizza category since 2019, seeing its share of global sales swell to 20.6% in 2022, according to Euromonitor data and our calculations. While we expect a turbulent couple of quarters, with the firm absorbing margin pressure to defend its value proposition with a lower-income clientele, we view the firm's long-term emphasis on defending franchisee profits, supporting the firm's growing carryout business, and building store density at the market level (fortressing) as prudent.

Domino's showed some signs of stabilization during its mixed first-quarter earnings, with 5.9% currency-neutral sales growth and 7.9% growth in operating profit driving a sharp pre-market pop (6%-7%) before earnings commentary drove a crushing share price reversal (down nearly 7% intraday). Traffic declines during the quarter and persistent pressure in the delivery business were sub-optimal if not entirely unexpected, with lower-income consumers trading out of the higher-cost delivery channel in favor of at-home meals. As we digest results, we expect to lower our $397 fair value estimate by a low-single-digit percentage due to expectations for top-line pressure to persist through the first half of 2024, in lieu of easing earlier in that year, but we view shares as quite attractive for long-term investors at a high-teens (17%-18%) percentage discount to our revised intrinsic valuation.

We believe that prudent adoption of digital ordering, restaurant software, and loyalty programs can yield meaningful benefits for the restaurateurs we cover as well as for astute investors who can identify today's digital leaders. We expect investments in technology to pave the way for food-service establishments to gain share from the grocery channel, settling just north of 55% of U.S. consumer food spending, ahead of our prior 50% estimate, as technology-driven cost savings enable restaurateurs to narrow the value gap with the cheaper grocery channel. The largest chains in our coverage are poised to disproportionately benefit from technology adoption; we forecast their share of total restaurant sales to grow by 200 basis points over the next five years, with wide-moat firms like Chipotle, Starbucks, and Domino's looking particularly well positioned. Investors looking for immediate-term opportunities should consider Domino's and narrow-moat Toast, which trade at roughly 16% and 17% discounts to our $397 and $21.50 intrinsic valuations, though we'd remain eager buyers of leaders like Chipotle and Starbucks at prices below our $1,550 and $103 fair value estimates.

COVID-19 drove sweeping changes across the restaurant industry, with operators scrambling to provide delivery integration, build out e-commerce platforms, and pivot to digital-driven models. For Domino's, which had already implemented the lion share of these initiatives, very little has changed. While the reopening of dine-in options has weighed on recent results, the firm has taken 220 basis points of market share in the quick-service restaurant, or QSR, pizza category since 2019, seeing its share of global sales swell to 20.6% in 2022, according to Euromonitor data and our calculations. While we expect a turbulent couple of quarters, with the firm absorbing margin pressure to defend its value proposition with a lower-income clientele, we view the firm's long-term emphasis on defending franchisee profits, supporting the firm's growing carryout business, and building store density at the market level (fortressing) as prudent.

Wide-moat Domino's trimmed its three-year systemwide sales growth (now 4%-8%, from 6%-10%) and unit development (to 5%-7%, from 6%-8%) guidance this morning, sending share prices tumbling 11% on the initial reaction. We believe that the market's concerns are overblown, with the pizza chain's admission validating our prior thesis; worse restaurant-level profitability in tandem with higher construction and financing costs should drive a medium-term contraction in unit development for most operators--Domino's is simply our first company to publicly admit it. We expect only modest changes to our own estimates, which now contemplate 7% and 6% annual system sales and unit growth through 2025 (from 8% and 6%), respectively, leaving our $397 fair value estimate effectively unchanged.