Why Domino’s Stinks Again
Summary:
● Domino’s rise from the “cardboard” grave
● Where do they stand with delivery aggregators?
● Analysis of DPZ
Rewind to '09, Domino’s Pizza was a fast-crumbling house of cardboard. They had recurring reviews like “worst pizza I ever had.” “The sauce tastes like ketchup.” “The crust tastes like cardboard. (Source: Domino's own commercial)”
They were inundated with complaints when (DPZ) President, Patrick Doyle, admitted in a nationwide apology ad that their pizza was terrible and promised to do better. Did they keep to their promise? Yes, they did. They came up with recipes that improved the quality of their sauce, cheese and crust. It was a hit as sales were up about 17% company-wide within six months.
The stock's move higher had follow through because it invested heavily in tech around its delivery process. They rolled out new features like online ordering, mobile apps, and GPS tracking. These innovations helped Domino's become what CEO Don Meij called "a tech company that sells pizza." (Lol..come on man, really?).
Fast forward a bit to the present, and let me paint you a picture. DoorDash, GrubHub, and other third-party delivery companies have made DPZ technology look like garbage water. Just terrible. Honestly, they can’t compete. DoorDash, Uber Eats, Grubhub, and other competitors gave Domino's the Texas two-step that left this pizza company with pie on its face. Except it didn't stick because it tastes like cardboard again, so it hit them in the face and just fell on the floor.
Domino’s as a pizza franchise has its business model crested on the vision of instantaneous delivery, but with an increasing number of its drivers leaving for delivery aggregators, that vision might just be turning into a mirage.
Honestly, drivers should leave. Why stay? These tech companies offer shorter shifts, flexible hours, and the ability to sign on at the last minute. Domino's drivers wear silly visors, have to put a clown sign on their car, and they smell like parmesan on the regular.
Domino's Ritch Allison, has clearly made his stance against delivery aggregators, stating Domino's is definitely not expecting any partnerships. Allison states, “When I take a look at our USP, I don’t see any need for us to go on to these third-party platforms. We have an incredibly strong digital channel in our business. We’re far and away the digital leader in pizza. So it’s just not clear to me why I would want to give up our franchisees margin or give up the data in our business to some third party, who will ultimately use it against us”.
Huh? What did you say? DoorDash is currently leading the e-commerce market with over 50% market share, while Domino's same-store sales have seen a decline of 2.9%. Looking out for the franchisees? Come on Ritch, save the crap for the customers.
A partnership doesn't seem important for Dominos? Domino’s clearly needs these partnerships, but instead, it has tagged third-party providers as its biggest competitors. Yet, one of its more direct competitors, Papa John’s (PAPA), has done well using companies like DoorDash and Uber Eats to provide delivery services. Instead, we have new Domino's commercials trying to call out third-party companies (can I insert a laughing emoji?).
They clearly can't get around the fact that they're trying to fight a technology they can't beat. They can't beat DoorDash unless they have their restaurants running tremendous amounts of business. There's no way they could compete with the flexibility that DoorDash offers drivers both in terms of pay and working hours.
Domino's was known mostly for its delivery, invested heavily in it, but has now decided to focus on its carryout arm through promotions and discounts as it has increased same-store carryout sales by 19.6% in Q3 2022 and 35% when compared to Q3 2019. Let's all say hello to the new Little Caesars!
Let's do some analysis
Personal IB Market Chart
Looking at the daily chart, we can see gaps from earnings announcements. This means we should be seeing the filling of these gaps very soon, and eventually, at some point, they'll gap higher.
It’s checkered on the zone indicators.
RSI was recently oversold, and as we can see, price took a little bounce towards the moving average and immediately got rejected like Dikembe Mutombo. Seriously, Papa Johns (PAPA) should make a commercial with Dikembe smacking a Domino's pizza box out of somebody's hand (Not in my house!).
Personal IB Market Chart
On the weekly charts, we see a compressing three-falling valleys pattern into a falling wedge, so we might see a run-up to the $330 space sometime around the middle of May and continue to decline lower.
Generally, we have a series of lower lows, and lower highs, which we can see has broken what was a very tight uptrend that started in 2016 (share buybacks...cough...cough). It broke through in September 2022 but then immediately reclaimed it. Options traders tried to save it, hoping it was a fake breach to trigger stop orders –which is what strong algos do sometimes–, and then it popped back up. Sad news, it broke again, like Glass Joe's jaw from Mike Tyson's Punchout.
Personal IB Market Chart
As we can now see, the moving averages are crossing over the long term trend line, followed by an immediate breakdown. This stock is now going into some dark trenches and management should be as scared as a Domino's delivery driver on North Broadway in Baltimore.
The RSI isn’t oversold but is currently at historic levels where it bounced off from 2019, 2021 and 2022; meaning price might retrace to higher positions. However, we need to consider that every other time it bounced, it was ABOVE the trend line, not below.
Personal IB Market Chart
Monthly charts are juicy. The company’s stock, down 49% from its all-time high, has deteriorating fundamentals, a lagging technology, and they can't compete.
Analyzing a zone indicator, the whole time it was on uptrend, it stayed as blue as the sky. Now it's back to red, similar to the 2008 crisis period when it was below the moving averages and the trendline. It just went below the trendline and the moving averages, so are we about to enter another financial crisis? Well, after last week's bank runs, I'm starting to feel like yes.
Personal IB Market Chart
Looking at the monthly and weekly charts we can see a stock that just led a breakdown with no defining tops or double tops, not even a star or an apex which is weird as you don't see stocks dissolve and break down like that too often. It had a staggered double top I guess....but really the whole thing just broke down.
Personal IB Market Chart
On the Fibonacci drawn from 2008 lows to the 2021 highs, we can see a play of historic supports and resistances between 261.8%, 161.8% and 100% Fibonacci levels. Although it's difficult to determine the support level for the eminent sell-off, I believe it would be between the 161.8% and 100% levels. There would be a further sell-off to $225 a share, which means another 30% downside for the stock before it finds any real support. It's just a busted stock.
Personal IB Market Chart
Therefore, my 12-month trading range is $215 to $350, the fair value is $140, and my 12-month price target is $215.
They have an $11 billion market cap and pay little dividends. I question this market cap. I mean, it's a business based on franchise, which everybody needs to understand is the equivalent of a company owning annuities. Franchises are sold like annuities, they have cash flow predictable like annuities, and they have federal rules like annuities. Investors are paying a lot of earnings premium on a franchise. You may say, "But Mark, there's infrastructure." Listen, developing verticals like Panera Bread did, is essentially a bolt on like F&I products in auto loans. It's a nice cherry on top, but it's not the sundae folks.
They shouldn't trade like McDonald's (MCD) or the like. McDonald's is the largest purchaser of lettuce in the world and also the biggest purchaser of beef, pork, potatoes, and tomatoes. That means they have the infrastructure, logistics, proprietary software, and purchasing power that allows them to buy into the futures market of these commodities.
Domino's is not that sophisticated and well-integrated. They are a pizza company that supplies their franchises with their dough, like Papa John's and other pizza companies. That allows them to make "bolt on" money and have their own verticals off that, which is what larger franchises tend to do. But at the end of the day, we are in an economy where they have to fight against competitors and shrinking consumer dollars as well. So discretionary spending has to reduce.
I do not believe they will be able to continue growing their dividends as they face substantial headwinds from the macro and micro economic situations. They have a whopping 6185 franchise stores and a measly 375 US company-owned stores. This leads to the question: how many franchises have SBA-backed loans that might go bad (due starting next month...), and how many of their franchisees won't be able to afford their debt service as rates rise? How many of their franchisees will be able to refinance their debt at higher interest rates when they come due in 2024 and 2025?
The company itself owns only a piddly 375 stores. The company's not even in its own hands. It's in the hands of the franchisees. What will happen if the franchisee sees a breakdown in consumer spending, lower generated revenue and eventually unable to employ adequate staff?
How long will it take before Domino's starts using third-party delivery apps as they continue to lose more market share to Grubhub and competitors? What will Domino’s do when the franchisees start demanding they get on these apps because they are losing business and at risk of going under?
Domino’s has a short percent of float ratio of 4.74%, which is a sign showing that institutions are pulling out funds and it's not downward pressure from "Dirty Mike and the Boys" shorting the stock. Domino’s is clearly overvalued, book value per share and tangible book value per share are both travesties, and this stock has been high wire trading to share buybacks that just broke like a rusty old guitar string.
Looking at their buyback program we can see that they had an accelerated share repurchase program with over $1b in 2021 but is now at laughable $23 million dollars. We should also note that in 2021, DPZ peaked at $567, and the SECOND they stopped buying back shares in a record flurry, their stock prices started to fall. So how much of the stock price was propped up by share repurchases?
Personal IB Data Chart
Domino's quarterly dividend has soared over the last five years from $0.55 in 2018 to $1.21 this year. It's important to note that these increases have been side by side with an increasing stock, but recently, they announced a 10% increase in its quarterly dividend, but this raises the question: Why are they raising dividends in a falling stock price environment? It's clear. They are doing this to look solid to investors despite lower demand and disappointing financial results; it's like running a masquerade show. How long can payout increase as stock price and metrics fall?
In conclusion, no savvy investors would prefer owning an $11 billion pizza "annuity," I mean company lol, as opposed to the many exciting opportunities with more upside value and significant discounts. Why would anybody pay a premium for this company? This is just too rich a stock with nowhere else to go but down. I'd really consider putting together a chart of market cap of companies at or below $11 billion and you'll see a compelling list of names. Not a pizza company that sells "lava cake" that taste like it came from your little sister's Easy Bake Oven.