Domino’s Suspends Long-term Global Net Store Growth Guidance

Image: Domino’s shares have done well since the beginning of 2023, but visibility into its long-term global net store growth has become murky given problems at one of its master franchisees.

By Brian Nelson, CFA

On July 18, Domino’s Pizza (DPZ) reported mixed second-quarter results that showed a slight miss on the top line, but a solid beat on the bottom line. Excluding foreign currency impacts, global retail sales increased 7.2% thanks to “higher supply chain, U.S. franchise advertising and U.S. franchise royalties and fees revenues,” while U.S. same store sales growth expanded 4.8% and international same store sales growth, excluding foreign currency, advanced 2.1%. Global net store growth was 175 in the quarter.

The company’s U.S. company-owned gross margin fell 1 percentage point in the second quarter on a year-over-year basis due to “higher insurance costs and increased labor costs as a result of higher wage rates.” Its supply chain gross margin “increased 0.4 percentage points in the second quarter versus last year’s period thanks to “procurement productivity, partially offset by investments in supply chain labor.” Excluding the negative impact of foreign currency on its international business, income from operations advanced 1.7%.

Management had the following to say about the quarterly results:

Our year-to-date performance demonstrates that our Hungry for MORE strategy is off to a great start, having an immediate impact on sales and profits. For the second straight quarter we drove U.S. comp performance in the healthiest way possible, through profitable order count growth. We had positive order counts in our delivery and carryout businesses, and across all income cohorts. Our strategy is resonating with customers and our system, which gives me great confidence that we can drive significant long-term value creation for our shareholders.

During the first two quarters of the year, net cash provided by operating activities increased 13.2% to $274.2 million, while free cash flow leapt to $230.5 million, up 12.8%. Its leverage ratio fell 0.6 turns, to 5.0x. For the period of 2024-2028, Domino’s continues to expect 7% annual global retail sales growth and 8% annual income from operations growth, both excluding the impact of foreign currency. The company hit its annual sales guidance for global retail sales growth in the quarter, but the pace of currency-adjusted income from operations was light.

Domino’s quarterly results and free cash flow performance weren’t poor by any stretch, but the firm disappointed investors with respect to its updated global net store growth forecast. The company noted that it will come up 175-275 stores short of its international store growth target in 2024, and it temporarily suspended its guidance that previously called for 1,100+ global net stores annually over the period 2024-2028. It now expects 825-925 net new stores in 2024.

The reason for the weakness has to do with challenges in both openings and closures facing one of its master franchisees, Domino’s Pizza Enterprises [DPE]. The company noted that it is partnering closely with the master franchisee to iron out the issues, but that it could not provide visibility into its longer-term store growth outlook “until the full effect of DPE’s store opens and closures on international net store growth are known.” We didn’t like the news, but we remain fans of Domino’s long-term story and are keeping the idea as a holding in the Best Ideas Newsletter portfolio.