By Brian Nelson, CFA
On February 26, Domino’s Pizza (DPZ) reported mixed fourth-quarter results, but comparable store sales came in better than expectations and the firm announced an additional $1 billion in buybacks, while it raised its dividend ~25%. We’re huge fans of Domino’s due in part to its heavily franchised business model, impressive digital initiatives, as well as its long-term unit growth prospects. The high end of our fair value estimate range of Domino’s stands at $569 per share, and we see meaningful upside from today’s price levels (~$465 per share) given the fundamental momentum at the firm.
During the quarter, Domino’s global retail sales growth, excluding currency fluctuations, came in at 4.9%, while U.S. same store sales growth was 2.8% in the period. Though the U.S. comp pace wasn’t breakneck by any stretch, it came in better than the 2.2% consensus had been expecting in the quarter. International same store sales growth, excluding currency fluctuations, came in at 0.1% in the period. Growth in income from operations, excluding a pre-tax refranchising gain that was booked in the fourth quarter of last year, came in at a robust 13% for the fourth quarter. Domino’s is still working through company-owned store gross margin pressures related to higher labor and insurance costs, as well as expenses related to the relaunch of its Domino’s Rewards program, but higher same-store sales is helping to scale some of the elevated costs.
Commentary around the quarterly report was also positive, as management put it:
Our strong fourth quarter demonstrates that our Hungry for MORE strategy is already delivering results. This strategy, which we recently unveiled at our Investor Day, is our plan to deliver MORE sales, MORE stores and MORE profits. Domino’s foundation has never been stronger. Our positive U.S. transactions and same store sales growth in both our delivery and carryout channels in the fourth quarter underscore the strength and momentum in our business. These results give us confidence in our brand and the Company’s ability to win and create meaningful value for our shareholders.
Free cash flow continues to be solid at Domino’s. Cash flow from operations advanced 24.3% in fiscal 2023 from last year, while free cash flow advanced 25.1%, to $485.5 million. The company added 394 net new stores in the fourth quarter, and excluding its closure of the Russia market, global net new stores grew by 870 in fiscal 2023. In addition to the comparable store sales beat in the quarter, the market also liked that it approved an additional $1 billion share repurchase program as it raised its dividend ~25%, to $1.51 per share on a quarterly basis. With the nice payout hike, Domino’s forward estimated dividend yield now stands at ~1.3%.
Image: Domino’s free cash flow increased meaningfully in fiscal 2023.
The pizza-making giant’s long-term guidance for the period 2024-2028 was also solid, with the company targeting 7% annual global retail sales expansion, over 1,100 global net new store additions each year, and 8% annual income from operations growth. Domino’s franchised business model translates to high economic returns, too, and the momentum behind its free cash flow is noteworthy, despite some pressures on company-owned store gross margins. Domino’s has a nice niche when it comes to value pricing, and we think U.S. store comp trends will hold up well as consumers continue to trade down given the step change in inflation the past 12-18 months. The company remains a key idea in the Best Ideas Newsletter portfolio.
NOW READ: 12 Reasons to Stay Aggressive in 2024
NOW READ: 2023 Was a Fantastic Year! Are You Ready for 2024?
———-
Tickerized for DPZ, PZZA.
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, QQQM, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.