Takeout pizza chain Domino's Pizza (DPZ +1.43%) has been around since the 1960s, but the past 15 years have come to define the company. Domino's completely redesigned its pizza recipe in 2008 and 2009. That was a risky move for a company with decades of brand recognition, but it paid off big time.
The company's success has reached new heights, as has the stock. A $15,000 investment made in early 2010 would be worth over $1 million today. In a global pizza industry that's worth an estimated $160 billion and is packed with fierce competition from other chains and countless local shops, Domino's is a juggernaut.
But can investors still expect similar outsized returns in the future?
Winning with efficiency and value
When Domino's management took up the mission of making its pizza taste better, it was a turning point for the company. However, the improvements to its pies were not the only reason the business thrived. The bigger picture involved a nearly unbeatable value proposition for the modern consumer.
It has become increasingly harder to feed a family on a budget, especially after rampant inflation in recent years. People will gravitate to a decent-to-good-tasting product at a low price. Pizza is arguably the perfect feed-the-masses meal, and Domino's can still sell pizzas for under $10 in many markets.
Domino's has an effective recipe to make this happen. First, it's a franchise business, which means it sells the rights to its brand, intellectual property, and technology to individuals who open stores and pay royalties and fees to the corporation. Second, the company emphasizes small stores with low overhead and employee counts, and it leans on technology to keep costs down.
NASDAQ: DPZ
Key Data Points
It's also easy to order from Domino's. The company's app allows you to order food, store a payment method, take advantage of promotions and rewards, and even track your order as it progresses through the kitchen. It can be a formidable challenge for mom-and-pop pizzerias, which still represent almost a third of the U.S. market, to compete with this combination of convenience, taste, and value.
There is still room to grow.
Pizza is arguably one of the most widely appealing foods globally, and Domino's has spent years expanding into the vast market for it. Today, the company has approximately 21,000 stores worldwide, including 6,906 in the United States. It has had 805 net store openings over the past four quarters, so it's still expanding its store footprint at a low-to-mid-single-digit percentage rate.
Management doesn't expect that to slow down anytime soon. Domino's is targeting a U.S. footprint of 7,700 stores by 2028 and more than 8,500 in the years beyond that. Internationally, Domino's wants to up its store count from roughly 14,000 now to 18,500 by 2028, and has set a long-term goal of over 40,000. All this expansion would foster growth even without factoring in contributions from increased customer traffic, menu expansion, or price increases.
Leveraging the balance sheet to drive investment returns
A franchise network of thousands of pizzerias creates durable cash flows. Domino's has taken advantage of that by strategically using its balance sheet to return money to shareholders. It has raised its dividend payouts for 12 consecutive years, and bought back enough stock over the past decade to lower its share count by almost 38%.
Management has been aggressive with this strategy, borrowing enough to leverage the business to between 4 and 6 times its EBITDA throughout the past decade. For comparison, McDonald's has a similar business model, but generally operates with a debt-to-EBITDA ratio in the neighborhood of 3.
DPZ Financial Debt to EBITDA (TTM) data by YCharts.
The company's tendency to carry higher debt levels than some of its peers creates a degree of risk that might turn some investors away. It has less of a financial safety net if the business struggles unexpectedly. However, it's worth noting that Warren Buffett and Berkshire Hathaway felt comfortable enough with the company's balance sheet to initiate a position in Domino's in the third quarter.
Does the stock still have millionaire-making potential?
The stock's performance has been remarkable since 2010, when the company had roughly 9,300 stores. Its store count has more than doubled since then. Management's long-term plans would double its business operations again, which likely means there is still tremendous long-term potential for investors.
Domino's trades at a price/earnings-to-growth (PEG) ratio of 2.5 today. That's not cheap, but it's not egregiously expensive, either. Analysts estimate the company's earnings will grow by an average of 11% annually, setting investors up for approximately 12% annualized total returns. That's 11% from earnings growth plus another 1.2% from the stock's dividend yield.
That's not as good as its returns since 2010, but Domino's is a fairly priced and potentially market-beating stock that should do well over the next decade and beyond.
