Domino's Earnings: Improving Margins and Not Uber Deal Represent Key Narrative; Shares Fairly Priced

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.