COMPANY PROFILE
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Recent Earnings
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Eric’s Opinion
Bill Ackman’s DPZ view. As of December 31, 2022 Pershing had a 4.2% weight in their portfolios.
Our investment in Domino’s was off to a strong start with shares up over 50% from when we made the investment in March through the end of 2021, driven by robust operating results and a late-year omicron-driven rally in “stay-at-home” stocks. Most of these gains disappeared in the first few months of this year with Domino’s stock price declining 29% through March 22nd. In addition to a broader market selloff, especially in higher-growth companies, we believe the recent stock price weakness is attributable to an ongoing slowdown in same-store sales growth that began in the third quarter of 2021. Domino’s has a long history of defying the skeptics and outperforming following brief periods of weakness, and we believe this time is no different.
The recent deceleration is driven primarily by driver shortages due to the current state of the U.S. labor market, which is acutely impacting the delivery business that comprises two-thirds of sales. While driver shortages have led to shortened hours and customer service challenges at many locations, the company is taking corrective action by conducting a full assessment of the driver labor market, launching new hiring and training systems, raising wages, and eliminating time consuming in-store tasks.
In light of high inflation in labor and food costs, Domino’s recently refreshed its core mix & match delivery offer by raising the price point from $5.99 to $6.99 and adding new products to the offer. We estimate that this one dollar increase will be a several percentage-point tailwind to same-store sales growth, without taking into account any positive benefit to ticket that Domino’s has historically seen from new product additions. This is the first time the company has increased the price on this offering in over twelve years, and we continue to believe Domino’s customer value proposition remains exceptional. Product innovation, a peak level of advertising funds, and the return of key promotions should provide additional tailwinds to sales growth.
Concurrent with fourth quarter results in early March, Domino’s announced the promotion of Russell Weiner, COO and President of Domino’s U.S., to CEO effective May 1st, the retirement of outgoing CEO Ritch Allison, and a new CFO hire. Shortly after joining Domino’s as Chief Marketing Officer in 2008, Russell led the wildly successful Pizza Turnaround campaign, which revitalized the Domino’s brand and led to 7% average U.S. same-store sales growth over the subsequent twelve years. We believe there is no one better equipped to drive growth for Domino’s, and are looking forward to what Russell can deliver in the years to come.
Domino’s currently trades at a mid-20s multiple of forward earnings, a compelling valuation given its leading position in the QSR pizza category enabled by its crown jewel digital and delivery infrastructure, the high certainty nature of the business, and its mid- to high-teens, long-term earnings growth. We are pleased that the company is taking advantage of its depressed share price by continuing to repurchase shares, consistent with its longstanding policy of returning excess cash to shareholders.