Chit Chat Stocks - Domino's Pizza (DPZ) with Matt Cochrane

Episode Date: March 10, 2022

Domino's Pizza is a multinational pizza chain. You have probably heard of the company, but maybe you haven't thought of Domino's as an investment. Listen as Brett and Ryan ask Matt Cochrane questions about the company, its business model, and valuation. Enjoy the show! This episode is sponsored by Stream by AlphaSense, the highest quality expert network library. Sign-up here: https://streamrg.co/CCM Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Matt's work? Follow him on Twitter here: https://twitter.com/Matt_Cochrane7?s=20&t=J7jJyALuPDqlTvsjb2mmnw Contact us: [e-mail]  Timestamps Domino's Pizza | (3:34) Management | (23:58) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we interview experts on an individual company. And today we talk with our long-time, multiple-time guest, long-time friend, Matt Cochran. He's a lead advisor at 7investing. We talk about Domino's Pizza, which has been a wonderful stock to own. And we haven't been owning it, so I guess to our detriment. But highlights from the interview, Brett, what do you have? Yeah, just going over how this is a simple compounder, if you'd probably put in that category, a lot of people overlook it, but they just do everything right. They get the technology right. They get the convenience right. They've fine. You know, after this last decade, they got the food right. They had the capital allocation right with the buybacks and the corporate structure and their franchisee model and whatever markets they're in. And Matt goes through all that. Yeah, and I can give a testimonial here. I did a little channel check this week, otherwise known as ordering a pizza from Domino's, and the taste has improved,

at least since the last time I bought it. So it is an interesting one. Matt knows it really well, and I think you'll enjoy the interview. But before we get to that, I want to talk about our sponsor for the week, Stream by Mosaic. They are an expert interview transcript library. If if you've never used them, I really recommend getting in touch with them. They've got a bunch of different call transcripts with experts on tons of companies. So it's 8,500 plus transcripts altogether and the industries cover everything. So tech, consumer goods, industrials, real estate, any stock you own. If you're wondering what, I guess, what do insiders think? What does someone who is really in the business think about that company? I

guarantee they've got a call transcript on there that'll be of use to you. So go ahead, check them out. You can go to streamrg.com. It's S-T-R-E-A-M-R-G.com. And I think you can sign up for a free 14-day trial using promo code CCM. If you do that and it doesn't work, reach out to us via Twitter, our emails, stretchoutmoneypodcast.gmail.com. Reach out to us some way and we'll get in touch with them, but I think it works. And without further ado, Let's get to the interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff

on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right. Today, we are welcomed by Matt Cochran. I think we might be getting to double digits here in terms of times on the show, but we've got you on again. We're talking Domino's

Pizza, which was fun to look at. I think a lot of people probably know them as a consumer, but maybe haven't looked at the business. So we're talking about them today. And Matt, I guess, just for reference is a lead advisor at 7investing. Feel free to use our code CCM if you want to check out some of his recs. But how's it going? When did you first get interested in Domino's? Well, thanks for having me on again, guys. I appreciate it. I always love coming on. I've been interested in Domino's for a lot longer than I've been invested in it. And that's much to my detriment. But yeah, I used to, you know, cover it as a writer like several years ago. And I've been, so about for five years, I've been covering it, but I've only owned it for like

the last two or three years. Okay. Can you describe the basics of the business model? And then the evolution is kind of interesting. So can you go over, I guess, some of the history of the company as well? Sure. So I don't want to like bore anyone, but like it started in 1960, right? The Moynihan brothers founded it. And like, you know, within weeks, like one of the brothers quit. So I'm sure that made for like some really interesting conversations like later on in their lives around Thanksgiving or something. But this, you know, the first location was near a college campus and they couldn't afford like a full restaurant size. And so, but Tom Moynihan was just like, well, you know, it's okay because we'll just have the college kids come here to

pick up the pizza or we'll deliver it to their dorms. And so what's important about that is like from the very, very beginning, Domino's was like all about delivery and carry out. And they were never about the dine-in experience. So, you know, we're going to get into this, but like competitive threats now and like how there's new delivery services out there. Domino's has been doing delivery for over 60 years. And so, you know, from there it took off and, you know, it went private, you know, it went public and it went private again. It was taken private by private equity for a while. Well, it goes public again in the early 2000s. And it didn't do that well. And they scored really, really high on customer service ranks for speed and delivery and

convenience, but they scored horribly for taste. And then 2007, 2008, as you're going into the financial crisis and the recession, a viral video goes out. And I know that's common today. I mean, there's like millions of viral videos out there that we've all seen. But at this time, like viral videos were still a new phenomenon. And the viral video was like some Domino's workers or people dressed up like Domino's workers doing very disgusting things to the food before it allegedly went out on a delivery. Now Domino's like later, it came out like that food didn't really go out on a delivery,

but what was really damaging to Domino's. So one, you had like this, you know, this viral video going around, which people thought was real, which that's obviously bad but the really the really horrible thing was like people were making comments uh about the taste of the pizza and just like well yeah like this is how it always tastes or whatever you know and i mean domino's was just like getting killed and you know in the comments on this video and everything and on social media and domino's was had in the works a plan to go on social media and start like a social media campaigns and have a social media uh like arm of their marketing department, but it's just kind of fast forwarded that. And they just decided to

go live with it. And they came out, like they had a new CEO, Patrick Doyle, and like their first huge marketing campaign, they basically just said, we're sorry for being so bad. And we're sorry we sucked for so long. And it was just all about like them, like they had, you know, gone back to the kitchen and like just revamped their whole recipe for pizza. And like, so they were coming out with new dough, new sauce, new cheese, fresher ingredients. And look, we all know what we're getting when we get Domino's, but they still upped the quality of their ingredients into the pizza and they completely redid it. And there was this huge viral marketing campaign of them going up to these customers who had left scathing reviews of Domino's online saying, look, try our pizza again,

give us another chance. We're sorry. At that time, at the worst of it, Domino's stock was about $3. Today, it's about $400. So if you had bought at the lows of the lows, or when you first saw this viral marketing campaign go out, you'd have had more than 100 bagger in the next 12 or 13 years. So since then, Domino's has just taken off. They've always had really high ratings for speed and convenience. But when they revamped their recipe with that kind of marketing campaign, it just really resonated. And ever since then, it's been off to the races. I heard, I heard someone say, yeah, they just added garlic salt to the crust. And then all of a sudden their, uh, their sales went to the roof, but it's whatever

it takes though. I don't know what they did. Right. So I don't know what they did. Uh, like I can tell you, like, you know, my family, you know, is a, is a regular customer of Domino's and like, you know, again, we all know what we're getting when we get Domino's like, you know, like a lot of times, like, you know, when I, when I talk about Domino's on a podcast or social media, there's always inevitably comments like, oh, I hate their pizza

or it's not as good as this one place. Yeah, obviously. Right. Like we all know, like if I go out with my wife to a nice Italian place and get like a brick oven pizza, like obviously a better quality than Domino's. At the end of the day, though, Domino's, I don't think they really sell pizza. I think they sell convenience, speed and affordability. And that's what like people want. I mean, those things will never go out of style. So as long as like Domino's sells an adequate product, taste-wise, you know, everything else-wise, like as long as they keep the speed, convenience, and affordability, like that's what they really sell. And so like, you know, think of Domino's not as like, to me, that's how I think of Domino's. Like that's what they sell.

And as long as they deliver on those three things, no pun intended, like they're going to be just fine yeah i can attest on the convenience being the most important thing because back in our college town um there's obviously multiple pizza places around since we were at a large university and domino's dominated because it had the best location best delivery latest hours quickest turnaround and it crushed um pizza hut or whoever else was over there and it really wasn't because of the quality, I'm assuming it was because of all that, but let's get into the economics of the business. What percent of the stores are franchised versus wholly owned? Because when you're looking at a restaurant concept at the core, this is the most important thing to start

out with because it changes the economics a lot. Yeah. So let's, I kind of went into the history, but I didn't really get into the business model. I think there's three important things to know about Domino's. One, it is a restaurant company, obviously, with a captive delivery arm, which is really important. And like we said, they've been doing the delivery for 60 years. Two, they're like a supply chain. They supply their US franchises with all the ingredients. Now, a franchise does not have to buy their ingredients through Domino's distribution centers and all that, but they're incentivized to do so. If they buy all their ingredients from them, They like they can capture like there's a profit sharing agreement with the franchises and distribution centers for the dough and the supply chain and all that.

And then and then third, and really where they make most of their money, they're a franchisor and like kind of like a brand manager for these companies. So it's important to understand like pizza is a really high gross margin food product. So you think about like a McDonald's or Burger King, they have to buy a lot of beef or they have to buy that protein. Like same thing with a chipotle or Taco Bell. They have to fill like burritos with a meat and a protein. Like Domino's, like their main ingredients, it's like dough and tomato sauce and cheese. And that's it. And I mean, yes, of course there's toppings on top of that, but like the main ingredients are this really, really basic and really cheap. So you're starting off with like on a store, like about an 80% gross margin. And if you're running

like a burger joint or something like that, your gross margins are going to be closer to like 60%. So already they have this huge advantage over other types of most other types of like foods that restaurants serve. And so you get into that. They have about 18,000 stores worldwide. About 6,500 of those are in the U.S. and about 12,000 are international. The vast, vast majority are franchises. There are about 400 stores that the company owns in the U.S., and the company mainly does that for a few reasons. One, they want to understand what it takes to operate a restaurant. They want to have skin in the game so that they're a good, like, franchisor to their franchisees.

And two, they use their store-owned companies for experiments. They'll try, you know, kind of like novel marketing campaigns or deals with their company-owned stores to try it out to see how they work. And then they just experiment with like different, like, you know, menu items and things like that. But, you know, so there's 400 U.S. owned stores or about 400, but 18,000 stores are franchised. And so you get into the unit economics of that, like domestic franchisees, they pay like a five and a half royalty fees on all sales. And then everybody pays an additional 6% of sales for marketing campaigns and things like that. So basically, you know, the stores are paying about 11.5%, half of which goes to marketing and half which goes to the corporate company. Going back to the gross margins, the franchise stores are super profitable. So, you know, if you're a franchisee, 95% plus of all stores in the US are run by someone who used to work in a Domino's as an hourly employee, either as a delivery driver or a pizza maker, you know, managers, things like that. So they've all worked in the store. They have to gain that experience. Then they can open up a store. It costs about $300,000 to open up a Domino's franchise. The franchise is clear over a million dollars in revenue every year. And you're clearing about, depending on who you believe, quite you believe, but you're clearing about $120,000, $130,000 in cash flow as an owner, $170,000 in EBITDA, like Domino's does release that.

so it's very profitable it takes costs like 300 350 000 to open a store and you're already getting like a third back on your investment as a franchisee uh like in that first year debt free so the very because of those high gross margins the unit economics just work out wonderfully okay that was a great overview of that i think one of the other key points of dominoes besides being the whole ecosystem that they built with their customers and uh franchisees and their wholly owned stores everyone kind of making out you know getting a lot of value from the situation is they haven't succumbed at all and correct me if i'm wrong to the food delivery platforms what are the advantages of keeping delivery in-house and what are kind of we said here

what is the potential for autonomous pizza delivery but i think maybe more broadly because I know you're not in the high tech realm of investing. What kind of technology investments have they made to maybe kind of keep themselves in a defensible position from someone like DoorDash or Uber? Okay. So let's first talk about the delivery and the importance of that. Like, so one, they're not sharing any of the revenue and they don't have to pay any revenue to the third parties like DoorDash or Uber Eats because they all do it in-house. And two, they have the data on their customers. And this will kind of like bridge into the tech question you asked, but they have 70 million emails. They have 29 million loyalty members in their piece of pie

rewards program. That's high. That's, that's about as high as you're going to find in the restaurant industry. They've done a lot with tech. And in fact, like, I think I've written some of these gimmicky articles, but like, you know, you'll see articles or people on TV say like talking heads, like say like, Oh, this is tech company sells pizza. You know, it's a tech company that sells pizza. It's not quite true, but it's like, they're very technologically progressive, I think is the best way to put it. They have this like huge innovation garage near their headquarters in Michigan, where they just try out all this new technology. And that's like manifested itself in a few key things. So like one, 75% of their US sales are now made through

digital channels. So that's really important. So like in the old days, people called up a store and said, I, you know, I want to order this. You have to have someone who's manning the phones to take down all these orders, write out the ticket and do all these things. Maybe more than one person doing it. When you 75% of your sales are coming in, you're getting really, really close to like that number where you don't have to have anybody answering the phones. If they all come in through digital channels, you're saving on labor right there in time. Two, they have what they call it anywhere program, but that's where W-A-R-E. And that means they want to make it so that on any device, you can order a Domino's pizza and make it as easy as possible. So you

can order Domino's on Alexa. You can order it like, you know, on Facebook or Twitter, or, you know, if you, you know, on Twitter, if you tag Domino's with like a pizza emoji and you have linked your Twitter profile to your Domino's profile, that will automatically trigger your favorite order. I mean, just things like that, which I mean, at the end of the day, how many people use that? Probably not many, but they want to remove the friction in ordering a pizza to make it as easy as possible for people to order. They have something called hotspots. There's 200,000 hotspots across the US. What that means is there's a lot of non-traditional delivery locations where meaning like there might not be an exact street address to where you are.

You could be at a park, at a pavilion, or you could be on the beach. You'd be at Central Park, which is huge, you know, and like, how do they know to find you? So these hotspots, you just tag yourself in the hotspot, like I'm at the pavilion at the beach, you know, or I'm at this park, you know, and I'm in the back on, you know, by the playground or whatever. And like, and Domino's has those saved in their system and they know where to deliver it to. So it doesn't have to be an exact street address. Just things like that make it really easy. They released a piece of tracker way before the competition where when you made an order, you could see where it was in the process.

It's in the oven. It's out for delivery, you know, things like that. So you could track your order. And their app removes friction. They had a zero-click app where basically if you saved your favorite order in Domino's. So like you, you have a preferred location and a preferred order and you just click the app and a timer would start. And at the end of the timer, uh, like your, your favorite order would just go through.

So my wife used to do this before we moved. Like she knew exactly where on her route, like she's battling rush hour on her way home, like to hit the app as she's driving, because she only has to just click the app and she knows the order will be ready. Like, uh, as she passes the dominoes on her way home to like pick up the order to bring it home. So just things like that. They want to remove all friction from ordering pizza. And they've been really, really progressive on that. And tying it all together, they have their own proprietary point of sale system that all Domino's location uses. And that makes it a lot easier for Domino's to look at all the unit economics and all the sales data from across all their franchises, which is like it's an underrated, I think, underappreciated aspect of their business.

Because most franchise models, like they'll just get their own vendors for their own point of sale system. And it's up to the corporate company to like tie it all together. It makes it a lot more difficult. But by having their own proprietary point-of-sale system, it just really neatly ties it all together and really allows Domino's to look at the data. Is there one, I guess, I don't want to say delivery, is there one method of pickup or delivery that's higher margin for Domino's? Do they prefer when customers carry out because it's less expensive for them, or do they kind of not break that out? So I think now it is definitely getting to that point because like the biggest issue facing Domino's right now is labor. Right. So they even talked about that on their latest conference call. And I'm not completely up to date on all their numbers. And, you know, I haven't analyzed the latest quarter as much as I like to yet. But like, you know, labor is like the big sticking point right now and finding delivery drivers. you know this is for any company right now just trying to find labor to to do it and um and so

now they've offered you know i don't know if you've seen it but they have promotionals right now like you know we're going to tip you if you come in and pick up your pizza you know um they're about to roll out next month well actually this month it's already march they're later this month they're going to roll out a new menu where like if you go on their website now it's like 5.99 for like a mix and match where you can you know you can get a medium pizza with pepperoni or like you know, garlic bread sticks or, you know, their brownies or whatever, you know, their chocolate lava cake. You can mix and match all these things on their menu. Well, now that'll be the carryout menu, but the delivery menu for the same items will be $6.99, not $5.99, just things like that.

So right now, I definitely think they're feeling a labor crunch when it comes to delivery drivers. Now, that being said, they're very, they want to own delivery. So they're, you know, they've been committed to it for over 60 years and they want to just make it convenient for people. So But I think you're going to start to see more things like that where it costs like a dollar more per item when you make a delivery. And what do you think of this? I don't know if you've seen this, but the autonomous delivery vehicle, the Domino's one, I'm looking at it right now and it looks like a little mini van type of thing. Do you think there's any promise there? Who knows, right?

I'm not ready to say there is or isn't. I think what's important to note about that is that they're experimenting with that stuff, right? Like, I mean, autonomous vehicles 10 years from now could be a reality. Maybe not. I'm not saying that will be. I'm not saying it won't be. I'm not the expert to ask about that.

You know, we have other advisors who are much more qualified to answer that question. What I would say is Domino's wants to be prepared if that's a reality in the future. So they are experimenting with things like that. And maybe you couldn't see it where like, you know, it's a reality in the suburbs, but could you have like these, you know, delivery robots or delivery autonomous vehicle vans deliver pizza to like, you know, a small urban area, like around a block, but it's like a very high capita or like a business center during the day. Yeah, I could see that. So I would just say, again, they're not afraid to experiment with that kind of stuff. And if they can find a way to deliver higher, you know, pizza at a, you know, at a higher margin to customers in a certain area using that kind of method, especially during a labor crunch, they're going to, you know, they're not afraid to like experiment with it and find it. Do you think there's any, I guess, room for margin expansion still from here or is, are they kind of peaking in terms of operating leverage?

Well, so their operating margin usually comes in a little under 40%, which is really high for a restaurant. Like right now, no. With like inflation, like they, you know, on their latest conference call, and this is all facing all restaurants, but like, you know, you have inflation. So, yeah, you do have rising food costs. Now, their food costs are less than their competitors. Well, you know, over the whole quick service restaurant industry. But like, you know, they do still have rising food costs and they do have rising labor costs and, you know, they're trying to find labor.

So, I mean, like at least for the immediate to medium term future, no, I don't see margins probably expanding. Now, fast forward 10 years and it goes to autonomous vehicles and you don't have to pay delivery drivers anymore. Sure, sure. But I think just the way, like we talked about, like 75% of their sales come in through digital means, right? Things like that, that's the low-hanging fruit for restaurants to go after to up your margins.

And Domino's has always done a really good job of doing just that. Okay, we've got some more questions, but before we get there, we're going to take a quick break. You don't need Wi-Fi to stream all your favorite movies. And in the morning, get fresh waffles with their free Bright Side breakfast. Or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com.

This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities. Okay, welcome back in. I have one question and I forgot to jot this one down, but what does, I guess, what are your overall thoughts on management at Domino's?

Well, they just got a new, they just named a new CEO. So I mentioned like Patrick Doyle took over and he did like a phenomenal job. I mean, he was the CEO from about 2008 until about four years ago. And, you know, the stock was like a 50 bagger in that time. I mean, just a phenomenal job. Allison took over and he just announced he was stepping down and their new CEO, Richard Weiner, I believe that's his name, is taking over. He's been at the company since 2008.

He was the president of the U.S. side before stepping in as CEO. But I think they have a deep bench. But it's hard to say. I mean, he has never been the CEO before. So you have to wait and see on the new CEO. Yeah, I guess it's a good point. Management. You can't really evaluate them when they've been there for so little time.

But one thing you kind of maybe people are surprised and maybe they aren't if they follow the story is how many stores Bellarmine has internationally. um i'm curious how big they are in italy or if they even can go in there because i was kind of thinking well some international countries might not appreciate the american style the pizza but how big is international expansion opportunity um because that should be and again correct me if i'm wrong a lot of the unit growth over the next decade yes so i think there's a lot of international opportunity now the international franchise arrangement is different than the u.s franchise arrangement. We talked about in the US, 95% plus of the stores, franchise owners

are former workers of Domino's. And internationally, they have a master licensor agreement. So they'll give a company permission to be like, you're in charge of all the Domino's in the UK. You're in charge of all the Domino's in Australia. And there's actually public companies listed on foreign exchanges for these companies. I mean, that's how big the Domino's ecosystem is overall. There's a public company for the one in Australia, the one in the UK, there's one in India and Mexico, but it's a master franchising agreement. And Domino's just takes a cut from the master franchisor and then a smaller cut for each additional franchise location they open up. That's only 7% of the revenue. But what's important to remember is they don't

do anything beyond that, beyond managing the brand stateside. So it's basically all profit. So it's really, really highly profitable for them. So even though half their pieces are sold internationally, that's only 7% of the US corporate parents revenue, but it's very high margin revenue. What are some of the countries internationally that they do well in? Or like what are some of the markets? So we talked about like, again, just look where the public companies are. Like, you know, again, the UK, very big, Australia, big, Mexico, big. And there's another one that covers like India, Bangladesh, Sri Lanka, like, you know, a lot of Southeast Asia there. Like the great thing about pizza is it's a very versatile food. Like, right. You can

put any topping or any, it's just at the end of the day, it's just dough. And you put any sauce and any topping on top of that with some cheese um usually some cheese but that's a pizza right you can call that a pizza so you can it's a very versatile food item that you can make like almost work i i think with at least any culture right where you can say like okay we're gonna put like you know this kind of topping on it in southeast asia and this type of topping on it in south america and this type of topping on it in north america with a different sauce or whatever but like, again, at the end of the day, it's just, it's just like some dough rolled out with a sauce and some toppings. Okay. And we got, we got a bunch of questions from Twitter

and some are really good. So one of those was around the idea of fortressing. So can you explain what that is and then why it's worked so well, I guess, for Domino's and maybe I've heard that it doesn't work so well in other areas, like non-pizza quick service restaurants. So what's the difference there? And can you just explain what it is? Sure. So first of all, the CEO, Richard Allison, who's stepping down, he introduced this strategy a couple of years ago. It's the fortishing strategy, right? That focuses on increasing Domino's store presence in existing markets to provide better service to customers by shrinking geographic coverage per store. That leads to faster delivering time

and adding locations that are closer to its carryout customers. So, you know, like during COVID, they asked Allison, is this like, you know, does COVID-19 change your thinking about purchasing? And he just basically said, no, I'm more enthusiastic about it ever. Like, and you can do this because the stores have such a high gross margin, right? So you can get your franchises to buy in because you go like Brett, if you have a store in Washington State and you're cover like, I'm making this up a little bit, but like five square miles or 10 square miles, right? And you're supposed to deliver to this 10 square miles and that's your coverage for your franchise store. Domino's, the parent company can go to Brett and say, look,

we want to we want you to open up another store in your area that will cannibalize sales from your current location but overall you're going to have more revenue and so the franchises can buy in on it because you're not like killing like uh you're not completely just like cannibalizing their sales and overall they'll be making more money and it's better for customers because you can get your pizza faster because the nearest location will be closer to you than otherwise And now there's more opportunities for you to pick up the pizza, right, in a convenient location. So that's what Fortressing is. Like, so why does it work?

So, like, well, that's why you get franchises to buy in. You start off with those high margins. And it works because, like, again, what does Domino's really sell? Does it really sell, like, cheap pizza or does it really sell convenience and affordability? And, again, they really sell convenience and affordability. And that's how they get everybody to like, that's why it works, right? Because that's what they really sell. And so by having more locations and more places, you have quicker delivery times, more convenient

pickup locations, and that's their whole strategy behind Fortress C. And a lot of times what you have with other restaurants is like you have, instead of like individual operators, you have like larger operators who own like more franchises than like Domino's or things like that. and they don't have the high growth margins to start with anyway. So they don't want to cannibalize sales from their existing locations. And they might not really, you know, if you don't deliver, if you don't have your own first party delivery drivers,

that captive arm of your restaurant to deliver, you don't want to like, you know, it's not part of your like DNA, I guess. If you just look at Donato's, what they sell is convenience, speed, and affordability, then it makes perfect sense. Okay. What do you think about the stock and evaluation at a price to free cash flow as well? This is when I was researching it. Obviously it can change from day to day, but at a price to free cash flow of approximately 27 and a half. All right, good. I'm glad you said the number

because I didn't know it off the top of my head. Yeah. So like, I think you're going to, it's expensive, right? I'm not going to, I can't come on here and say like, This is a deep value stock, but it has grown EPS very consistently over the last decade. It has grown same store sales very consistently for a very long time. So I consider this one where, you know, you're going to have to, you almost always have to pay up for quality. And so I think that's what, you know, it's not cheap. It's not cheap, but I don't think it's like outrageous either.

I think, you know, whether you look at price to free cash flow or price to earnings, like, you know, it gets better every year. It's very consistent with its buybacks, very consistent raising its dividend by double digits every single year, et cetera. So I think, you know, I think it's I think it's worth the price you pay for. I guess it's the best way I can put it. What is their I guess, like, I don't know, what's their growth strategy going forward? More stores, are they getting anywhere close to saturation, like market saturation? And then it doesn't seem like this is a pricing power type of company. So I guess, how do they grow from here?

So, well, a few things, like one, they think they can reach 8,000 stores in the U.S. And if the fortune-sharing strategy works out, I think they might be underestimating that a little bit. So they have about 6,500 stores now in the U.S. So they can still grow their presence in the U.S. alone by about 25%. 25%. Internationally, there's several markets that are far, far from saturated. So they still have a long way to grow internationally. So I think there's plenty of room growth left. Now, I would like to touch on what you said, like pricing power. One of the reasons I really,

really like Domino's is because I consider it, one, an inflation-proof business, and two, a recession-proof business. Now, a lot of people would argue with the inflation proof of that, of what I just said. But they don't have as much food cost as their competitors. And I think they actually do have pricing power. So if you look at their menu, you go on their website, and they're really big on this $5.99 mix and match menu. If they raise that price by a dollar, you're raising it by almost over 15%. That's a 15% price increase. And I don't think that will deter any customer from not buying it. That's still very affordable when you consider it over the entire like you're eating options for that night. I don't think 599 to 699 is going to change anyone's

mind. I don't think if you take that to 799 in this inflationary environment, that's going to change anyone's mind. Now, they don't want to raise prices. And I think that's smart because I think if you go through like we're going through, like an inflationary time, if you can hold low prices, you're going to take market share as you go through this inflation. But I do think they have pricing power actually. And I think they're like purposely not exercising it as much as they could. And as far as recession wise, during recession, you're not making as much money. You want to save more money. Buying a couple of pizza pies for your family and watching a movie on Disney Plus or Netflix on Friday night is still a very affordable, maybe the most

affordable thing you can do with your family or with your significant other. Like, hey, let's just grab a pizza. We don't, you know, skip making dinner. We're going to grab a pizza for six bucks and watch a movie at home. Like, so it's still, I just think it's a very sneaky inflation and recessionary play. Yeah. Less whole foods, more Domino's during a recession. I mean, I think that's very easy to predict. Less sit down restaurants and, but more like, you know, cheap takeout. So Domino's has put up consistent same store sales growth over the past decade um that's something very few retail and restaurant companies can boast what is i mean you've talked about i think a lot of the moves that's helped them here but is there

anything else that's really helped them achieve this consistency no again i just think they're very technologically progressive they may they will do anything to remove friction to ordering the pizza um again from any platform to any location with the hot spots things like that They're just always they're always seem to be one step ahead of the competition when it comes to removing friction from making a purchase to pizza. They're they're always affordable. They're always fast. And and like even things like, you know, things we haven't talked about. They have a simpler menu. Right. So like, you know, when you look at their competitors like Pizza Hut or Papa John's, they'll introduce these like, you know, wild more wild flavors or like 20 different types of crust you can get or, you know, things like this that they can do for a limited time dominoes doesn't do that the only time they

introduce a new menu item it they'll see if it can become a permanent menu item they want to have a simpler menu because again they're not worried about having like the you know the the chacaroni special or the pretzel crust uh cheese filled dough or you know any of that stuff they're not worried about that they want to be quick cheap and affordable would that's what they're worried about. Okay. The, some of the, maybe I'm thinking about this wrong, but would fortressing and cannibalizing your own stores, I mean, that, that has sort of a negative impact to same store sales, wouldn't it? 100%. Yes. And it's interesting that they've been able to implement that model and still grow same store sales. That's, that's why most people won't do

it. Right. But they, if you look at the bigger picture and that's why it's like so important to have like, it's really hard. Imagine, you know, having a franchise locations saying, hey, look, we want to eat your store sales, right? That's really hard. But they're able to do it because they have such like strong franchisee buy-in from like their high margins, you know, proven business model. And they try it. That's again, that's an advantage of having their 400 stores. They can experiment on their stores first and see what the real effects are and say, look, when we tried it on our stores, this is what happened. This is what happened to our existing sales. And again, though, the bigger picture is to say like, we're going to have more locations.

So that means faster delivery time and more convenient pickup locations. All right. So last question before we get to some fun ones. And we try to ask this for most of the deep dive interviews, but what threats are there to Domino's business or their position in the market right now? And then I guess, what do you think could go wrong? Well, okay. So with any restaurant, you have these like weird things that can happen, right? I mean, look at Chipotle a few years ago, right? Where you had like some food poisoning outbreaks at some of their locations and that just like devastated their sales for about two years, right? So you can always have like events like that happen. And, you know, that's an advantage of like their supply chain model. They control all the food that goes to all the U.S. locations, all the U.S. locations anyway.

You know, so hopefully like they'll have a better control of that. They're not getting it, you know, they're not, you know, like the Florida locations aren't sourcing from a different, you know, dough manufacturer than the California locations or what have you. um so you always have like possible events like that that can happen you you also have like um if you don't evolve and tweak your menu like over time your menu can go stale and i think you do see that with restaurants and you know kind of my philosophy with owning restaurants i don't think there's too many long-term buy and hold restaurants out there as invest that work as a as long-term buy and hold investments uh i think domino's is one of the few of them but like uh but because they don't really sell again i see it as they sell affordability and convenience i don't see

them selling like this great luxury food item so because of that i'm not too worried about the the menu going stale like if it does like they they will need you know they might have to up their their game when it comes to the dough or the sauce or whatever but i i think that's like very doable for them and then and then three like a lot of times what you hear is like domino's is great yeah, but like Uber Eats and DoorDash and all these other now third-party food delivery apps are going to come in and the novelty of delivering pizza will be gone. That has not been the case so far. And I don't think that will be the case. I think when you look at the overall or total carryout restaurant sales in the US and you look at the delivery sales, every carryout order is a

potential delivery order. It's how I look at it. If you're not going to dine in at a restaurant and you're taking your food, whether it's home or somewhere else to eat it, that's a delivery opportunity. And that gap is still huge. I don't have the exact numbers I had right now in front of me, but like that number, like there's still a huge amount of carryout sales compared to like overall delivery sales. So that gap is huge. So there's still this huge gap for delivery. And again, you know, I just don't see any of them ever being as cheap or as affordable or inherent to their business model, right? Inherent to the DoorDash and Uber Eats business model,

like you have to pay the restaurant, then you have to pay the third party. Like inheriting their business model, they're just never going to get as cheap as Dominos and they're never going to get as quick as Dominos. And I'm thinking about that, like the wage pressure hurts Dominos, but I imagine it hurts those players

just as much if not more. Everybody in the industry is affected, right? So, I mean, you see this across all retail, right, where I think right now you're just in a situation where the big guys are going to compete better than the small guys. And, you know, I'm not necessarily happy about that, but I think it's just reality that like, you know, in retail, if you just look like Target can afford to pay their employees more than like a one-off, you know, discount store or same with Amazon. And then in the restaurant space, again, the big players can afford to pay their workers more than the smaller players too. And in an inflationary environment, Domino's can hold the line better on pricing. They're already cheaper than almost everyone else, so they can even raise those prices and still be cheaper than the competition. So I think they just have many advantages compared to like smaller players.

All right. Some fun ones that were requested via Twitter. First one, what is your family's choice pizza? My family's choice is pepperoni. My wife wishes it was ham and pineapple. All right. What is, oh, Ryan, did you have something to add to that? I was going to say, well, for you, are you a pineapple or a no pineapple person? Um, my wife can arm twist me sometimes into getting a ham and pineapple pizza, but, uh, that is not my first choice. It's usually my last choice. All right.

And this is a, this is a semi-serious one. Um, well, it depends on how you want to answer. What should they add to their menu that currently isn't on it? Wait. Okay. I'm going to tweak my answer a little bit. They have chicken wings on the menu, but they're not good. if they could find a way, I mean, they're not good to the point where like, I won't eat them.

Like, I'm just like this. I mean, they just drown them in sauce. Like it's horrible, but if they could find a way to like make their chicken wings, like edible, like that'd be great. I mean, off to the races. Right. I mean, who, how can you beat that combination of the, I don't know, saying they have to be like the greatest chicken wings out there, but just, just like semi, like, you know, let's get a, let's get an innovation center up in Buffalo. Right. Right. Right. Let's figure it out, figure it out because then it's like off to the races as far as i'm concerned yeah i mean in all seriousness that would be a great i mean value proposition i'm just thinking mainly through my yeah through my lens that's when everyone used

to get it in college i mean if they had chicken wings as well that were good um yeah i mean that would be like a one plus one equals three i mean almost like anytime i'm watching a football game i would order i mean and we'd just be like off the charts but yeah that's a lot of personal bias into that but i would love them to see like just their chicken wings just don't cut it and i'm not like the pickiest eater either uh as you can tell but like yeah their their chicken wings don't cut it so if they could find a way to like just up their game on their chicken wings it would be to me that's like you know time to go maybe maybe a wing stop uh acquisition uh this is getting real speculative but i i used to consider that um but i was dissuaded from that line of

thinking it is probably better to know how to make everything in-house in a very simple way like and again so like going back like we get to the simpler menu like everything they have on your menu is baked in the exact same oven right so they they they you know there's no like special ovens like mcdonald's to make breakfast a long time ago they had to like introduce new equipment into the kitchens and things like that um like domino's never wants to do that everything has to be baked in the same oven they just got to find a way to do their chicken wings better is is there any i guess last question is there any scenario where you see them becoming uh i guess an acquirer or is it is their model too unique or distinct to like

go out i don't think so in fact i think it would be a red flag like going back to like their proprietary point of sale um and how they can see all the data from all the stores as soon as you acquire like let's say they acquired wingstop right which is like uh you know maybe an achievable market cap that they could acquire. And it's easy to think like that food combination just works as we already discussed. But are you going to rip out all the point of sales at Wingstop to give your own proprietary point of sales? Is that going to disrupt Wingstop's operations? There's just so many things like that I think would be really hard to make it work. Really, their game plan is just to build out the store presence. And, you know, they're not, they want to capture market share,

not buy it. All right. I think that's all the questions that we have. Brett, do you have any more? Nope. Okay. All right. Well, Matt, thank you again for coming on the show. This is another reminder, check out Matt's picks at 7investing using our code CCM. But without further ado, I'm going to hit the disclosure here. Brett and I are not financial advisors, so anything we say or discuss here on Chitchat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast.

Thank you all for listening. We'll see you next time.