Josh Shores of Southeastern Asset Management presented his in-depth investment thesis on Domino’s Pizza Group (UK: DOM) at Best Ideas 2020.
Thesis summary:
Domino’s Pizza Group (£1.4 billion market cap; ~£613 million 2019E revenue) owns, operates, and franchises pizza stores in six European markets. The company has 1,261 stores, of which 90% are franchised and 10% are corporate-managed. DOM is a simple business — makes dough and sells it to franchisees along with other ingredients and essentials. The underlying franchise is strong, with mid-single digit like-for-like sales growth and significant growth potential in core markets in the UK and Ireland.
A failure to hire the right people and manage key franchisee relationships created mistrust and the inability to extract the full potential of the underlying business. Poor understanding and handling of the concerns of franchisees led to a breakdown in trust. New management and board members can address this breakdown. Three change agents joined the board in 2019, while longstanding chairman Stephen Hemsley departed the company. According to Josh, immediate steps can be taken to solve the franchisee impasse, return the company to strong long-term growth, and drive a rerating by the market.
Josh believes DOM could be worth 2x its recent market cap based on potential growth, ROIC, cash generation ability, and trading multiples of comparable peers (EV/EBIT of 13.4x vs. comp group average of 20.8x; P/E of 14.3x vs. 25.7x; EV/EBITDA of 11.6x vs. 17.2x; and EV/sales of 2.2x vs. 5.7x). Domino’s entities that are publicly listed in the US (DPZ) and Australia (DMP) trade at multiples that are in line with the peer group (which includes Sonic deal multiples, McDonald’s, Wendy’s, and Yum Brands).
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About the instructor:
Josh Shores is a co-portfolio manager for Longleaf Partners International Fund and a member of Southeastern Asset Management’s Executive Committee. After seven years in Southeastern’s London office, Josh is now based in Memphis and focuses on Non-US investments. He joined Southeastern in 2007 after working at Smith, Salley & Associates in Greensboro, NC and Franklin Street Partners in Chapel Hill, NC. A University of North Carolina graduate, Josh holds bachelor’s degrees in Philosophy and Religious Studies. He received his CFA designation in 2006.
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