The Intrinsic Value Podcast 对 $DOMO 的判断变化

largest pizza company in the world with over 22,300 locations in 90 different markets. Little Caesars is kind of the leader in lowcost carry out options and then Domino's focuses mostly on delivery. And since Domino's really started as a delivery food business, it makes sense that it has stayed true to its DNA to this day.

But getting back to your original question, so Domino's focuses on the franchise model where it acts as a franchiser. So 99% of all the Domino stores that are out there are owned and operated by independent franchises.

The franchisee model makes a lot of sense because as I mentioned earlier, Domino's provides their franchises with a few things. things like, you know, training, supplies, fresh ingredients, and then the marketing aspect. But they don't take part in actually owning the stores, which obviously saves a ton of money and is a big reason why Domino's has these really, really big gross margins at about 40% and free cash flow margins of about 13%.

Domino's is basically the engine in the back helping the franchises operate well. And both sides, I think, are well aligned. Domino's makes more money when their franchises make more money. And when franchises make less money, Domino's collects lower franchise fees. So yes, Domino's is a royalty business, but they are closely tied to the underlying performance of their franchises. So it's not like they've been able to completely hedge out all of the risk in this business model.

And from franchises perspective, you're basically paying to tap into the brand power of Domino's. And yeah, sure, you could go out and start your own local pizza business and have 100% equity and, you know, no one will have ever heard of it and you'll have no reputation for quality and that'll be a pretty tough way to get your start. Or you could just take on a Domino's franchise and you immediately get to take advantage of their global brand and your store is going to automatically get more traffic simply because people know the name alone.

So, let's just get back to some of the details here on how Domino's generates revenue. So, the first area that I want to look at is pretty obvious and that's just, you know, collecting royalties and fees from its franchises. So, royalties are these ongoing percentage of total sales. So in terms of large restaurant businesses, the word they tend to use is called systems revenue or system sales or as Domino's puts it just retail sales. Now retail sales are the total revenue sold by all of the Domino's stores worldwide. But just remember here it's not Domino's actual revenue.

But this is just a part of the business right with the franchise fees. So Domino's also generates revenue from its company owned stores in the US. It's supply chain and then advertising. In fiscal year 2025, they earned about 33% of their revenue from US stores, including both franchises and corporate own stores. So just in the US, they have nearly 7,000 franchises and then about 260 or so corporate own stores.

And so, with some of the DD that I've done, I really actually think that having a small amount of corporate stores is probably the best strategy for a few reasons that maybe aren't the most obvious. But with Domino's, I mean, this is not an emerging technology. You'd think that you could learn everything you need to know by just walking up and ordering a pizza from the company, but obviously it's not that simple.

but the thing is that when you're thinking about Domino's as a business, you have to remember that there's multiple parties involved with it. You have the end customer who might be me or you Sean, if we decide to eat pizza, but then you have the franchises who are ultimately making that pizza for us. And then you have Domino's who make sure the franchises are running smoothly and collecting a percent of the revenue. And just for context, the fee on sales in the US today is about 5 and a half% and internationally it's around 3%.

So, as we think about Domino's, with the US portion of Domino's revenues being so substantial, with Domino's having started in the US, I would imagine that they view the US as their most important market. Is that right? That's completely correct. Since Domino's started in the US, it's by far its largest segment.

And another thing I like about Domino's is that even though they have roughly say 7,000 US franchise stores at the end of 2025, they're actually owned and operated by only 754 independent franchises. And so obviously what this means is that the franchises, I think, are really really serious about their Domino's businesses because a lot of them own multiple Domino's locations.

Domino's clearly has a really good network of franchises because the number that I just mentioned means the average franchisee in the US owns about nine locations although they disclose that about 211 other US franchises are operated by only one store which actually makes that number even higher for the people who own more than one store.

Now on top of this most franchises must also manage a store for at least a year before being granted the right to franchise. So, you know, many franchises just start off really from the ground up as like delivery drivers or as people baking the pizzas. And I think this is a really nice advantage as it means the franchises are going to be very very intimate with how the business runs, what it takes to be successful, and maybe what it takes to fail and hopefully try to avoid those things.

Another thing that I thought was really interesting was that Domino's tends to restrict its franchises from being involved in other businesses, which I think really, really helps them stay focused and to prioritize the Domino's pizza stores that they already own.

All right. So, we got revenues so far from royalties and then we have corporate advertising costs that sort of get passed on as an expense and then you've got the corporate owned stores where Domino's is directly operating them and capturing 100% of the revenue generated and I think that all makes sense. We also mentioned earlier the supply chain component side of things and my understanding is that basically they provide the ingredients to their franchises and they sell them to them and that's how this segment generates revenue. And so this is almost in some ways more like a logistics business than anything.

And the supply chain is actually the dominant part of Domino's overall revenue at about 60% of its revenue in 2025. So this segment really takes the cake as Domino's primary revenue driver.

But one important thing to remember about Dominoes is that the revenue it gets as franchise fees is going to be much much higher margin compared to the revenue that it's going to get from let's just say it's supply chain or even its corporate owned stores. So EBIT margins on the supply chain for 2025 were pretty thin at just 10%. Contrast that with the total US stores which includes both franchises as well as corporate owned stores and those have edit margins about 36%. But then if you want to see the actual strength of the franchise model, well, the highest margin segment is actually the international franchise segment where they have zero corporateowned locations and the margins there run at 85%. Add that all up and you have a business doing approximately 21% EBA margins on about $5 billion in revenue.

Right? So for starters to understand why I think Domino's wants to be vertically integrated you have to remember that a franchise business works best when everything is really in sync. Right? So for a brand to work well across America, the pizza should really taste the same whether you're in Alaska, Hawaii or New York. And I think this is why they have the supply chain operations in the first place, just to really ensure consistency across their franchises.

So you know, Domino's actually went through a period where its pizza just kind of got out of favor with their customers and they had to make large adjustments to the original recipe just so that customers would actually enjoy the pizza again.

So I think the supply chain, it's not seen as a profit center. Obviously, it has these kind of lower margin profiles, but it's a very important function inside of Domino's. And that's really just guarantee that there's the right amount of quality and the right consistency in their overall product that the consumer will ultimately consume.

So, the interesting thing also to consider when you look at Domino's is that the supply chain isn't global. So, the supply chain is only really in North America. So, as of 2025, they have about 22 dough manufacturing and supply chain centers, two thin crust facilities, and one vegetable processing center in the US. And then in Canada they have five dough manufacturing and supply chain centers.

And just for context for the listeners I read that in those supply chain centers they're operating over,00 tractor trailers that supply more than 7,800 stores with dough and all the other complimentary products needed to maintain Dominoes quality.

And so my question for you is, has Domino's instituted some sort of strategy where they're able to avoid putting too much undue pressure on their franchises and better balance that relationship?

So from what I read, it doesn't appear that franchises are required to buy from the Domino supply centers, but it looks like most of them end up doing it anyways, and there's a really, really good reason for that. So they have a profit sharing plan with their franchises who purchase their food from the supply centers. So their disclosures say that they offer franchises approximately 50% of the operating income from their supply chain operations.

And if there's something new and exciting out there or a pizza available at a special discount, even most fans of Domino's aren't going to exclusively eat at Domino's. Recurring customers can change on a whim. So at a high level, I I still am trying to understand, you know, what is it that really keeps customers coming back to Domino's? Yeah, there's, you know, definitely zero switching cost to ordering a pizza from somebody else. And yet Domino's, for whatever reason, keep selling more and more pizza.

So based on some of the data, again, this is data that Domino's provided from their latest investor presentation, they claim to have captured another 1.6% 6% of the market, whereas other national brands have actually lost share along with some of these kind of more regional brands.

So, I think Domino's in simplicity and probably to some degree in mind share. If you don't want to think about dinner on a Friday night after a long busy week, it's kind of easy to just open up the Domino's app and just go to town ordering whatever you want on the app. You know what you'll get and you'll know that it'll be delivered on time and fresh.

I do think brand recognition is a real advantage for sure, but you do have to spend a lot on marketing to maintain that advantage and Domino's certainly does do that as just a recurring cost of business and it does help to have a decent product behind all that marketing. And with Domino's, they have done a really good job improving the perceived quality of their pizza in the last few years. I would say just my own experience, I think the pizza tastes a lot better than it did maybe a decade or so ago.

my assumption is that the capital efficiency of a business like Domino's is pretty good simply because the franchise model doesn't require a lot of investment from the corporate perspective, right? The franchises are the ones putting up the money and the margins are super high specifically on the franchise part of the business.

Yeah, you're absolutely correct. And then to your point there on advertising, the franchises basically aggregate all their money together and that also takes care of a lot of the advertising as well, which obviously boosts the capital efficiency of Dominoes as well. So yes, I mean the franchise part of the business is really about as capital light as you can possibly get, especially internationally where Domino's just leaves a supply chain to their master franchises. But, you know, the overall business is going to be somewhat dragged down by the supply chain part of the business, which obviously doesn't require a ton of reinvestment, but definitely requires more capital than the franchise only part.

But, you know, even with the supply chain business and with Domino's having their own corporate owned stores, ROIC has been running at about 100% over the last 5 years or so, which is frankly mind-boggling, especially for a business selling $12 pizzas.

But we do have to keep in mind that Domino's has some unique advantages specifically on the denominator on the invested capital part of the return on invested capital equation. So net operating profits after tax or nat which is the top of the equation has been compounding at only 4.2% between 2021 and 2025. So this return on invested capital is being propped up by other changes in its invested capital base.

Well, it's probably not fair to say that these numbers are the result of financial engineering, but it is important when looking at ROIC to really break down the individual parts. And so, you can't always look at ROIC and and take away conclusions that your returns will come close to the historical number because there are a whole lot of variables involved.

If you earn incredibly high returns on your existing investments but have no capacity to further invest money, let's say every good spot for dominoes has been taken, then well the reinvestment rate collapses and the incremental returns on capital are going to fall off and that is what ultimately drives returns for shareholders in the future.

Totally. So what I'm seeing with Domino's invested capital is that it's not shrinking but it's rising very very slowly similar to the growth in their net operating profits after tax and going forward there's reason to believe that invested capital may continue to actually decline and the reason being that Domino's has continued to unwind its company owned stores. So if you go back to 2022 they had about 375 stores versus today where they're down to 186. So, you know, they're getting rid of those stores and this should make the business even more capital light and could even improve working capital. Although it's already quite a low number for them.

I definitely think that Domino's as a corporation needs to run a number of stores themselves so that they stay in touch with the needs of franchises, which is what we were talking about earlier, and having that experience of directly running Domino stores themselves. You can't just totally be a passive player on the sidelines licensing out your brand. We also don't need maybe 300 stores to have some operational skin in the game either.

So, I'm sure they can generate a ton of cash by selling off some of these locations effectively. But again, you need to have ways to reinvest that capital and otherwise you just get a cash heavy balance sheet, which is sort of a high class problem to have. But for shareholders, it's going to weigh on returns going forward because the interest rate on cash is low. And the whole point of being an equity investor is to own shares in a business that can deploy cash at higher rates of return than bonds or what you would be able to do yourself. So you don't want to have a business just sitting on a bunch of cash indefinitely.

And when I was looking at Domino's balance sheet, I did see something kind of funky that was a little confusing. And that's when you look at the equity section of the balance sheet. And so for instance, if you're trying to find this company's return on equity, it's actually not possible. It's going to come back as a negative number. And that's because the company's reported equity is -4 billion today.

Yeah, this is a pretty strange wrinkle for Dominoes. And it's something that you kind of only see a lot in startups that might go these really, really long periods of just losing so much money that the equity might have a negative value. But I can assure you, you know, Domino's does make a lot of money. So in 2025, they made $600 million in profits.

Now, generally speaking, you'd expect a company making that much money in profits to reinvest part of it into its business, which then increases the equity. But this isn't part of Domino's's capital allocation strategy. So under Domino's's current strategy, given the fact the business doesn't require that much capital to run the business, they spend about 2.3% of the revenue on capex, which is a surprisingly low number for a retail restaurant. But I think that's part of the attraction of their business model. Instead of reinvesting into the business, they are laser focused on shareholder distributions, both in terms of buybacks and in dividends.

Absolutely. And at this stage of Domino's growth cycle, I think returning cash to shareholders does make a lot of sense. I do have a small gripe here though. Okay, let's hear it. So I like buybacks and dividends when a company doesn't require adding debt to pay them out. And if you look back, there have been multiple periods in Domino's history when they repurchased more shares than they actually generated in free cash flow. In order to fund these share repurchases and dividends, they had to come up with that money from somewhere and they came up with an interesting strategy to do it. So they have actually recapitalized multiple times over the last decade, which has helped them fund large buybacks and dividends. For instance, if you go back to 2022, they repurchase shares worth $1.32 billion while generating $650 million in operating cash flow. And then you factor in $139 million paid in dividends and you can see where I get a little uneasy here.

Well, >> it's just something you have to be careful about. I mean, in theory, if your stock is trading massively below intrinsic value, then levering up to buy back as much stock as possible is actually an excellent maneuver in capital allocation. But it's also not sustainable evidently to buy back more than you generate in cash flow. And by taking out debt, you're borrowing against your future earnings power. you'll have to pay interest going forward that reduces your earnings down the road. So that's why I say it's just something that has to be done carefully and intentionally.

And [clears throat] to be fair, it does look like they haven't done a massive one-off repurchase of shares since going back to 2022, which is is maybe the right move, but buybacks and dividends are still continuing to increase. And even now, it doesn't appear that Domino's has the cash to cover the amount of capital that they're distributing to shareholders.

And this brings us back to the point I made earlier about Domino's Pizza being able to really increase its earnings per share over the years while only growing revenues in the mid- single digits. So over the last decades, like I mentioned, earnings per share has compounded at 15% while revenue has compounded somewhere around 7%. Now, this is obviously the true power of buybacks. So, while I do commend them for drastically and meaningfully reducing their share count, I do think to get a complete picture, we have to look more at their debt situation. And kind of right off the bat, it's just not my favorite setup. So, today long-term debt is about $4.8 billion. And they are generating approximately a billion in EBIDA. Their covenants state they must stay below 5.5 times debt to adjusted EBITDA, which is a pretty high number in my books. And the hope is that they can continue to issue debt against their revenue streams simply because those revenue streams are very very durable. But still that's not guaranteed, right? I mean, we're talking about a pizza company, not a utility business.

Exactly. So, you know, Donald's obviously doesn't run a normal corporate balance sheet. It's financed through these whole business securitization. So instead of a typical, you know, just a revolver and term loan structure, Domino's leverages its own royalty streams, intellectual property, and supply chain distribution income. These are then pledged as collateral for asset back notes, similar in spirit to the royalty structure that I mentioned with natural resource partners at the top of the show, just applied to debt instead of equity.

And because they can issue these notes on their assets, they actually are getting some very solid interest rates. The blended average coupon is just 3.82%, 82% which I think is right around the Federal Reserve's interest rate. They just don't have to pay a premium on top of that like they would normally with normal debt. But the current strategy is really to just roll the debt over. They refinanced just last year just to pay back the principal and notes from 2015 and 2018. It's worth noting that rates today are higher than they were in those previous periods. So even though they are rolling the debt over, the coupons today are actually higher than they were back then, meaning they're rolling the debt over at a higher and higher cost.

You could probably look at this as both a negative or a positive. On the negative side, that is a lot of debt for a business that optically does not have the strongest competitive advantages necessarily. But if lenders are willing to lend at these interest rates, even if they're assetbacked, they probably disagree about Domino's durability as a concern. They have to have a lot of faith in the business. It gives Domino's a lowcost financing advantage over most other companies that they can exploit to basically reduce their cost of capital and plow more cash into share repurchases and do so using debt. And that's exactly what we've seen.

That's right. So, I mentioned Tom Monahan at the beginning of today's episode, but I haven't really discussed too much about the current management team. Domino's is interesting because it has been through five different CEOs in its entire existence. And when you think about how long the business has been around for, that's actually a pretty decent average tenure, which generally notes a good culture. So today's CEO is Russell Weiner, who has been in the business for nearly 18 years. He's not really a rags riches story as he didn't start with Domino's as just say a delivery boy or anything, but the fact that he's been inside the ecosystem for so long to me is a thumbs up. So he started as the chief marketing officer and step by step just worked his way into the CEO position, which he's now held since 2022.

Now looking at insider ownership, I mean it definitely leaves a lot to be desired for a company with a market cap of just 11.5 billion. Having less than 1% of ownership from both executives and directors to me is really really low.

Absolutely. So, looking at the paymix for the CEO, he makes about 9% of his total compensation as base salary. This is pretty great to see as his total comp relies so heavily on performance, but his base salary was $925,000. So, you know, total comp goes up to about $10 million if he ends up meeting all of his hurdles. The remainder of his comp is in a mixture of long-term and short-term incentives. And these hurdles are based on things like adjusted EBITDA, which require reaching a specified target. I think I can safely say I'm not crazy about this metric, but you know, on the other hand, this target has grown by about 10% per year over the last 5 years. So, you know, at least they're giving him a target that should create hopefully some sort of growth and alignment with shareholders. The remainder of the incentives are based on things like retail sales growth and relative total shareholder return. It's worth noting that the benchmark is not the S&P 500, but it's actually a restaurant subindex of the S&P.

>> I think I like that more than 70% of the potential comp package is tied to long-term performance metrics, but you'd certainly rather see those metrics being connected to earnings per share and not adjusted IBITA where you're artificially creating a non-GAAP metric to measure earnings rather than using a more objective accounting standard.

I couldn't agree more with you, Sean. So, overall, you know, management in terms of looking at their performance, it's pretty decent, but I would be lying if I said I was blown away. If we look at a few KPIs since Russell Weiner has taken over, you got compounding of revenues of about 3% and then earnings per share and EBIT about 5%.

Another yellow flag that I think I have to mention here is that the majority of insider transactions over the last 2 years have been sales and a lot of these have been in the exercising of options. So, in the last 2 years, there actually hasn't been an open market buy that I could find. This is also pretty disappointing when you consider that the business has had multiple 30% draw downs and right now is coming off a 39% draw down. It would be really great to see insiders taking advantage of this alongside other shareholders.

>> It would, and I think we should get into this topic in a little more detail. I know the whole reason Domino's became interesting for you was because of this drop in its share price. So, how about you take me through what happened over the past few years that have caused this decline?

So, the one that really kind of sticks out to me is a classic reduced growth rate hurdle that I think a lot of businesses tend to face just as they exist for a longer longer period of time. So, since 22, revenue has compounded at just 3%. For the decade before that though, it was a much healthier 11%. So this to me fully justifies the PE really dropping from over 40 times in 2020 down to around 20 times today.

But when we're talking about investing, we do have to look forward and not just backward. Part of what got me interested in dominoes was asking whether the current growth rates are now the new normal or if they're just kind of some sort of medium-term headwind they're facing and maybe previous growth rates are achievable at some point in the future.

The other major issue is in the same store sales growth. So in Q2 2026 it came in at just.1% in the US and it actually slightly declined by.1% internationally excluding foreign currency. So you know the market is currently seeing these declining numbers and not really taking into account any future growth at this time.

>> It definitely explains the drop in the multiple. But I mean wow 40 times earnings for Domino's Pizza at the time that that seems insanely rich to me.

So, if we examine risks a little more closely, I also think debt is one risk you certainly have to take into account. The fact Dominoes can go up to 5.5 times leverage is pretty concerning to me given the fact that