TIP839: Domino's Pizza (DPZ): Is the Royalty Engine Still Running? w/ Kyle Grieve & Shawn O’Malley

In today's episode, Kyle Grieve and Shawn O’Malley analyze Domino's Pizza, the world’s biggest pizza franchisor built on a royalty-driven, asset-light business model. They walk through Domino's shift toward franchising and away from Company-owned stores, and what that means for the company's future revenue mix and cash generation. Along the way, they dig into whether Domino's royalty engine can keep running at the pace investors have come to expect. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:02:55) Reviewing the Domino's royalty engine thesis (00:15:26) Why Domino's has moved away from Company-owned stores (00:29:19) The role of royalties versus supply chain revenue in Domino's earnings (00:36:21) How Domino's utilizes a fortressing strategy and its effect on store growth (00:44:18) The competitive landscape in delivery, carryout, and aggregator platforms (00:46:29) How the franchise model keeps Domino's asset-light and cash-generative (00:55:47) Domino's capital allocation and approach to share buybacks (01:03:44) International franchising and Domino's global store growth (01:05:25) Risks facing Domino's from labor costs, competition, and changing consumer habits (01:13:19) Valuation discussion of Domino's (01:14:31) Intrinsic value of Domino's (01:15:52) Whether Kyle & Shawn will add Domino's to the Intrinsic Value Portfolio Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about how to join us in NYC for our ⁠⁠⁠⁠⁠⁠⁠Intrinsic Value Conference⁠⁠⁠⁠⁠⁠⁠. Portfolio Review ⁠⁠⁠⁠⁠⁠Submit Tool⁠⁠⁠⁠⁠⁠. Check out our previous Intrinsic Value breakdowns: Uber, Grab, Coupang. Buy yourself a copy of ⁠The Domino’s Story⁠. Follow Kyle on ⁠⁠⁠⁠X⁠⁠⁠⁠ and ⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠⁠⁠sponsors⁠⁠⁠⁠: ⁠Plaud⁠ ⁠Plus500⁠ ⁠Netsuite⁠ ⁠Scribe⁠ References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  All right, folks, welcome to the Investors Podcast today on episode 839. We are digging into a business nearly everybody listening has probably ordered from at least at some point in their life, or maybe their college days in particular. It's Domino's Pizza. It's the largest pizza company on earth with more than 22,000 stores in over 90 markets. And it runs one of the most capital light business models you'll find. 99% of its stores are owned by independent franchisees with Domino's collecting a pretty healthy royalty on top of that. And so that structure has helped the company compound its intrinsic value consistently for multiple decades now.

• 0:40Speaker 02

  And all this sounds pretty great until you look at some of the recent events. Revenue growth has kind of slowed to a bit of a crawl over the last four years. Same store sales are hovering near zero and the stock has actually fallen 40% from its all time highs. One of its biggest shareholders in Berkshire Hathaway, which once held roughly a 10% stake in the business, ended up selling out of the entire position at the beginning of 2026. And on top of that, Domino's is carrying close to $5 billion in debt on a business that's now facing some pretty real questions about changing consumer health habits.

• 1:09Speaker 01

  Even with all that, the returns on capital have been fantastic and franchisees are still very much lining up to open new locations, both in the US and internationally. So the real question is whether this is a temporary rut for a great compounder or the new normal for a maturing pizza chain. Let's get into it.

• 1:31Speaker 00

  Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Kyle Grieve.

• 2:17Speaker 02

  Now, before we start today's episode, I want to discuss something that I personally am really, really excited about. So in September, we're going to be hosting our Intrinsic Value Conference in Manhattan, and we have just a lineup of really excellent presenters, all from our community.

• 2:30Speaker 01

  And people are saying it's going to be the value investing event of the year. So no, it is going to be a lot of fun and it's going to be a great place to meet up with other value investors, all looking to find great investing opportunities and also hoping to build genuine relationships. So if you want to go ahead and secure your ticket before they sell out, head on over to intrinsicvalueconference.com. And going back to Domino's now, we haven't really covered a business on this show that makes money from selling food. I mean, you could say that we have a little bit of exposure through Amazon, right? They have Whole Foods and then Uber Eats, but they're sort of a more delivery logistics business.

• 3:10Speaker 01

  And really the only other restaurant connection we have in our intrinsic value portfolio is via Berkshire Hathaway, where we have exposure to one of Warren Buffett's favorite restaurants. That is of course Dairy Queen and then some sweets and Berkshire's ownership of Seize Candies. But other than that, we've tended to stay away from food related businesses or restaurants because well, the competition there can just be absolutely brutal. But today, we're going to buck that trend and look at one of the holy grails of restaurant franchises, Domino's Pizza, and see whether it's worth investing in.

• 3:48Speaker 02

  Yeah, I'm really excited to pitch this one to you, Sean, because the whole business model of franchising is something that I personally find really, really fascinating. Let me tell you why. So you could think of a franchise as pretty much being a royalty type business. And royalty businesses are really interesting because they don't have to spend too much just to maintain the business and can earn some really, really high margin revenue for the right, just to use its name or its system. So royalty businesses, they're really all around us. You know, I used to own one in Natural Resource Partners, a business that owned a ton of real estate and I ended up leasing it to these kind of larger coal mining companies. So their customers would mine the coal, they would sell it and then just simply return a percentage of the proceeds to Natural Resource Partners. Now, the best part was that Natural Resource Partners did not actually have to take any part in the construction or the maintenance of the mine.

• 4:33Speaker 02

  They just sat back and let the cash come rolling in. And it's also clear that obviously Warren Buffett understands the strength of a franchise business very, very well, which is why he purchased Dairy Queen in 1997 for about $585 million. And the math is quite simple. You know, the franchisee pays a one-time franchise fee, then they pay royalties of about 10%, which includes a marketing fee. So as long as that franchisee is successful and they're selling a really, really good product, well, then both the franchisee and the franchiser is collecting money.

• 5:01Speaker 01

  And when you put it like that, it does make me feel like, boy, maybe we've made a mistake by not looking at more royalty like businesses. And even if there is just a lot of competition for restaurants and, and I mean, just to think about it, every local restaurant you have in town, before counting all the corporate chains, there's just so many and that's all competition. And so when we think about other royalty like businesses that we've looked at, maybe you could argue that Google's is sort of a royalty on search and Uber earns some sort of royalty on ride sharing and Airbnb is maybe a royalty on alternative accommodations. And I guess my main issue with royalty plays and something like the food and beverage

• 5:46Speaker 01

  industry is that tastes change and they can change so quickly. And if tastes change enough, that customers no longer see the product in a good light or, or want to eat healthier or have other options. It's not hard at all to simply stop going to one restaurant and pick another across the street. And with Uber Eats, we don't even need to go across the street anymore. Anywhere within a 30 minute radius is fair game to have the food brought right to your house.

• 6:10Speaker 02

  I totally see your point. And I think for any investor out there, I think this is probably your biggest worry when it comes to owning a franchise business that specializes specifically in pizza. You know, like you mentioned, in pretty much any town you go to in North America, you probably have dozens of options of where to just get pizza from, let alone any other cuisine that you want. So, you know, why would anyone remain loyal to a company like Domino's Pizza? And I think it's a good question. And today, hopefully we will maybe try to clear up some of the answers to it and find out whether Domino's is the type of business that's worth owning in the intrinsic value portfolio.

• 6:41Speaker 01

  Well, I know Domino's has quite a lot of history for us to go through. So how about we start there and trying to understand really the DNA behind the underlying business and why it does what it does today after operating for more than 67 years.

• 6:57Speaker 02

  Yeah, so Domino's start is very interesting and in some way, it actually reminds me a lot of Ray Kroc and McDonald's with a couple of big differences. But let's rewind back to 1960. So at this time, Domino's didn't exist a name, just as kind of a concept. And the concept, of course, was pizza. So Dominic DeVardy owned three locations of Dominics, one in Ypsilanti and two in Ann Arbor. Now, what DeVardy had caught on to was the focus on specifically delivering pizza to people and not just having people come and grab it or having people come and eat in the restaurant. Now, unfortunately, the pizza business wasn't quite right for DeVardy and he ended up selling it to two young brothers, Jim and Tom Monahan, for the large sum of $900.

• 7:39Speaker 02

  Now, Tom is a vital figure here because when he bought the business, he was studying to become an architect and the pizza restaurant was actually more of a side hustle to help him pay his tuition. Now, like DeVardy, Tom's brother Jim didn't really see too much of a future in the pizza business. So Jim ended up selling his ownership stake to Tom in exchange for the business's Volkswagen Beetle, which had been used to help deliver those pizzas.

• 8:05Speaker 01

  It's always fun to hear these origin stories and founders who ended up selling their stake for nothing. I guess it's not really funny. It's more sad. I mean, you can only imagine the pain of that regret that you might feel. Most famously, Ronald Wayne owned 10% of Apple when it was a startup and he sold it for something like what, 800 bucks? And that would be worth tens of billions, maybe hundreds of billions of dollars today. So that's pretty tough.

• 8:30Speaker 02

  Yeah, that is pretty tough. And I don't know about you, Sean, but stories like the one that you just said are pretty good at really scaring me into just holding on to the businesses that I do have for the long term. You know, as long as I find some really good compounders, hopefully I won't have to experience that kind of regret, but I assume I'll, I'll make it there at some point. So getting back to the story here, when Jim left Dominics, it left this really, really large void for Tom to fill. And like I said, so he was in school full time. He was kind of left with this very, very tough decision to make. He could either stick with pizza or he could stick with architecture, but doing them both simultaneously by himself, now that he was running it by himself without his brother, was just no longer an option. And of course, he chose the pizza direction, which is a decision that I also might have made if I was in my early twenties too, since I was a very heavy lover of pizza in those days.

• 9:15Speaker 02

  But you know, Tom, he was very, very focused and I don't think he was just your average young man. He took the pizza business incredibly seriously. So when researching him, I actually got a lot of Sam Walton vibes, reading about some of the things that he did. So let's go through an example here. When he wasn't working in the shop, he would actually travel around the city to all of his competitors' restaurants, just to test their pizza and understand, you know, what are their strengths, what are their weaknesses? And so he did this exercise kind of to try to figure out, okay, well, who out there could beat us? And he thought the people that could beat them were the businesses that maybe had the best tasting pizza sauce. And so while discussing this problem with one of his suppliers one day, one of his suppliers mentioned another restaurant in the city that had the best pizza sauce that he'd ever tasted in that specific town.

• 9:59Speaker 02

  So Tom ended up visiting the restaurant. He complimented the owner after trying the delicious sauce. And luckily the owner saw this young kid in there and actually gifted him the recipe for that sauce.

• 10:10Speaker 01

  I mean, if you're going to own a business, you might as well do it right. I love hearing these types of stories because it's usually the entrepreneurs wanting to go above and beyond who end up winning. And it does matter a lot more in businesses where you have really no competitive modes, which is really what we're talking about here with a three store pizza chain. And you've got to hustle for every dollar you make.

• 10:32Speaker 02

  Yeah. And as I'm a big fan of these kind of smaller public businesses, I can attest to exactly that. Often in these smaller businesses, the only real reason that they succeed is just because they have an owner who's willing to put in that much more work than any of his competitors. If you have an owner who just sees a business as maybe some sort of lifestyle business, or just a side hustle, well, they're going to get their lunch eaten by competitors that are willing to do all the little things just to make that business a little bit better than all of its competitors. So, you know, just looking at some of the other things Tom Monahan did, he helped just kind of improve the whole process of delivering pizzas, not necessarily the delivery process, but in baking the pizzas. So, for instance, he would look at the layout of the kitchens that he was working with and try to figure out, okay, well, I can make X

• 11:17Speaker 02

  amount of pizzas, let's say per hour, how can I increase that number? And so he came to the conclusion that he could reduce the time by doing a couple of different things. One was to basically change the layout of the kitchens by moving the ovens as well as the counters. And that would shave off a little bit of time to help them keep up with the increasing demand that they were seeing. And obviously, because they could sell more pizzas, it made the company more and more profitable. And then on top of that, Monahan also simplified the menu. So Dominix had originally had about five different sizes of pizza. And he eventually just cut that down to two, actually out of necessity, because there was one day that he came to work and I think half of his staff wasn't there. And so basically, he couldn't do all these different things. So someone just said, let's just make two sizes and let's try it out. And that's what they did. And they basically forced

• 12:00Speaker 02

  all their customers to pick between these two sizes. And it ended up working out very, very well.

• 12:05Speaker 01

  Major restaurant franchises today are like factories. I mean, they can be unbelievably complex for what seems like a pretty straightforward operation, right? It's just making pizza. But they are, of course, playing a volume game to be able to make money at scale. And you've got to be able to crank out orders to have any kind of operating leverage and profit. And so honestly, the company that is maybe the best I've ever seen at this is Chick-fil-A. I mean, great chicken and maybe even better efficiency. I mean, you see a long line at Chick-fil-A, it doesn't even make me hesitate because I know I'm going to get right through it. So, too bad they're not a publicly traded company though. But going back to Domino's, how about you take us through the name change? And how do

• 12:47Speaker 01

  we go from Dominix to Domino's?

• 12:51Speaker 02

  Right. Yeah. So it's funny, in Canada, we actually don't have a Chick-fil-A, but I have tested it out once in Hawaii. And actually, you're kind of right. Every time I would go buy it, there'd always be a massive lineup. So one day, we were just like, you know, let's try it out. And surprisingly, it moved pretty fast. So yeah, kudos to them on their operating system. So as Dominix, which obviously was the original Domino's, scaled up, the original owner told Tom that he could no longer use the name as they didn't really want to create confusion with their customers. So by 1965, the name Domino's was chosen. And so you'll notice here that the name is actually very similar to Dominix. And this was completely done intentionally. So since Dominix had this kind of loyal customer base, Tom didn't want to end up losing those customers by choosing a name that would be buried somewhere else in the phone book under some different letter. So he figured Domino's

• 13:34Speaker 02

  works because it would be close enough to Dominix in the phone book. So Tom also discovered just how powerful the franchise business model was and decided to start maybe taking advantage of it himself. So he met Ray Kroc of McDonald's and John Brown of KFC. And being kind of a younger man, he noted that they were flying a private jet, so being chauffeured in Rolls Royces. He felt like that was a lifestyle that he kind of wanted, but three stores was definitely not going to get him there. His first franchise had pretty low franchise fees of just about 2.5% with a 2% advertising fee. This is about half of today's industry standard. Now, I could get into a lot more detail here with the history of Domino's, but the business model has definitely changed a lot over the years. So needless

• 14:15Speaker 02

  to say, I think Tom Monahan was once a large part of the Domino's story, but he ended up selling about 93% of his stake in the business to Bain Capital in 1998. And now he's not really any part of the business.

• 14:26Speaker 01

  Domino's is interesting because even though they've essentially been completely disassociated from their founder for almost 30 years, the business has still been incredibly successful over that time and creating shareholder value. And we spend a lot of time on this show talking about the magic of founder-led businesses. And Domino's is very much not that. On the other hand, though, it is a business where if you just looked at the top line, I don't think you would be blown away by it. 6% revenue growth per year over the last two decades is, is okay, but it's definitely not inspiring by any means.

• 15:01Speaker 02

  Yeah, I have no argument there, which is probably why I probably never really took a huge interest in this business, despite the fact I've been a pretty large consumer of Domino's all through my twenties. But Domino's takes advantage of one thing that is missing from a lot of businesses, and that's a serious focus on capital allocation. I mean, how else really can you describe their ability to increase their earnings per share by 15% over that exact same time period when they were just delivering 6% revenue growth?

• 15:26Speaker 01

  I think I can see your eyes getting bigger there because I know how much you love a good capital allocator. So let's dig a little more into what Domino's is and how it generates revenue. Some restaurants own all their locations, but from the sound of it, when it comes to Domino's, they take a very different approach.

• 15:45Speaker 02

  Yes, they do. So the first thing to know about Domino's is that it's actually the largest pizza company in the world with over 22,300 locations in 90 different markets. So when most people think of pizza, they may think of other competitors like a Pizza Hut or a Little Caesar's. Now, together with Domino's, these three are the largest pizza chains in the world by store count. And they all kind of have their own different niches, despite a little bit of overlap. For instance, Pizza Hut dominates the dine-in pizza market. Little Caesar's is kind of the leader in low-cost carryout 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

• 16:26Speaker 02

  question, so Domino's focuses on the franchise model where it acts as a franchiser. So 99% of all the Domino's stores that are out there are owned and operated by independent franchisees. The franchisee model makes a lot of sense because as I mentioned earlier, Domino's provides their franchisees 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%.

• 16:58Speaker 01

  Domino's is basically the engine in the back, helping the franchisees operate well. And both sides, I think, are well aligned. Domino's makes more money when their franchisees make more money. And when franchisees 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 franchisees' 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 no one will have ever heard of it. And you'll have no reputation for quality. And that'll be a pretty tough

• 17:40Speaker 01

  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.

• 17:53Speaker 02

  That's completely correct. I think, I remember a few years ago, I was actually thinking how cool it would be to own a franchise restaurant, not necessarily to actually take part in operating it, but just to have a restaurant, like, you know, have a restaurant of food that you actually like to eat. So for instance, where I am, there's this kind of local chain called White Spot. And you probably have never heard of it unless you've been to British Columbia. But it's huge in BC. Everybody knows about it. And so I actually looked into, okay, you know, what would it cost me to become a franchisee of that business? And it was really interesting because I was just thought in my head, I'm like, okay, well, I have no idea how to own a restaurant. And I don't really have any desire to really learn. But I just liked the turnkey nature of some of these franchise businesses because the franchisees have all gone through similar problems. They've all gone through similar

• 18:38Speaker 02

  hiccups on how to grow. And so when you buy as part of a franchise, you know, you're getting these turnkey solutions. They know how to operate the business. So I just wanted to mention that because I just find these franchise businesses just really interesting because if you're looking at it from opening a new restaurant, it makes a lot of sense. So let's just get back to some of the details here on how Domino's generates revenues. 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 franchisees. 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

• 19:22Speaker 02

  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, its supply chain, and then advertising. In fiscal year 2025, they earned about 33% of their revenue from US stores, including both franchisees and corporate owned stores. So just in the US, they have nearly 7,000 franchisees and then about 260 or so corporate owned stores. So I got a chance just doing my due diligence as part of this episode, as well as just being someone who really enjoys learning more and more about franchisee models, to speak to a number of different franchisees over the years and to just kind of better understand how they work, you know, what makes them tick and just kind of understand the industry.

• 20:03Speaker 02

  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.

• 20:14Speaker 01

  Yeah, I actually like it myself because it reminds me of what Uber is doing with autonomous vehicles. They're buying some small fleets to manage so that they basically better understand the nuances of working with them, even if they don't want to actually be managing fleets of self-driving cars at scale. I think it just helps them better understand the economics behind what is an emerging technology. 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.

• 20:47Speaker 02

  You would think that, 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 franchisees who are ultimately making that pizza for us. And then you have Domino's who make sure the franchisees are running smoothly and collecting a percent of their revenue. And just for context, the fee on sales in the US today is about 5.5% and internationally, it's around 3%. So from what I've learned, speaking with these franchisees from many, many different restaurants and not just pizza, but what I really learned was that there's this kind of tension that exists between the franchisee and the franchiser. So the franchiser is demanding certain things from its franchisees. You know, that might be things such as renovations to their locations, just to make sure that they look fresh and that they're keeping up with appearances.

• 21:32Speaker 02

  Or they might ask them to discount specific menu items as part of a company-wide sale. Or, you know, they might create a little bit of animosity between some of their franchisees when one franchisee is getting charged a specific franchisee fee and another one's paying more or paying less. So the problem is, is that when franchisees are unhappy, well, that business can run into some very, very serious cultural issues that can really destroy an entire business. So a good example of this would be Quiznos. I don't know about you, Sean, but I remember years ago grabbing their chicken carbonara sandwich and it was fantastic, but they actually plunged from about 5,000 locations in 2007 to just about 300 or so today. And that's because the franchisees were basically being forced to buy more and more expensive

• 22:13Speaker 02

  ingredients from a Quiznos subsidiary that was supplying them with those ingredients. So the franchisees began suing and they put Quiznos into nearly a billion dollars in debt just so they could try and fight these court cases. An additional issue that Quiznos had was that corporate would do things like issue these free sandwich vouchers and the franchisees had to give these free sandwiches to their customers at their own expense. And so they were obviously really, really annoyed by that because it was eroding their own margins.

• 22:40Speaker 01

  Gosh, who would think there'd be so much drama in selling sandwiches? I definitely remember Quiznos though. We had one in town when I was a kid and I very much enjoyed going there after football practice and getting a meatball sub. So Quiznos though, is maybe a really good depiction of the bear case for any restaurant chain, having a robust nationwide presence and then fading down to what is really just a few stores in comparison. It's almost hard to understand how you could reach that scale and still fail, but that is a different case study for another day. So as we think about Domino's, with the US portion of Domino's revenues being so substantial

• 23:21Speaker 01

  and with Domino's having started in the US, I would imagine that they view the US as their most important market is, is that right?

• 23:29Speaker 02

  That's completely correct. Since Domino's started in the US, it's by far its largest segment. And another thing that I like with Donald 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 franchisees. And so obviously what this means is that the franchisees, I think, are really, really serious about their Domino's businesses because a lot of them own multiple Domino's locations. So in smaller franchises, you can kind of run into problems where the owner sees the business just as some sort of lifestyle business and isn't really taking it as seriously as someone who's willing to maybe put 60 or 80 hours a week into just making the stores as good as it can possibly be. Domino's clearly has a really good network of franchisees because the number that I just

• 24:13Speaker 02

  mentioned means the average franchisee in the US owns about nine locations, although they disclose that about 211 of their US franchisees 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 franchisees must also manage a store for at least a year before being granted the right to franchise. So, you know, many franchisees just started 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 franchisees 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 franchisees from being involved in other businesses, which I think really, really helps

• 24:58Speaker 02

  them stay focused and to prioritize the Domino's pizza stores that they already own. Let's take a quick break and hear from today's sponsors.

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• 28:10Speaker 02

  All right, back to the show.

• 28:13Speaker 01

  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 a hundred percent 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 franchisees 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.

• 28:49Speaker 02

  Yeah, I would say that's pretty accurate. 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 Domino's 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 EBITDA 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 EBITDA margins of 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

• 29:31Speaker 02

  where they have zero corporate owned locations and the margins there run at 85%. Add that all up and you have a business doing approximately 21% EBITDA margins on about $5 billion in revenue.

• 29:42Speaker 01

  It definitely makes things messy when different segments have such wildly different profit margins. And it's hard to look at the numbers for the entire enterprise as a whole, then to decide what a fair multiple of earnings is because every dollar of earnings is not equal. And you probably then want to do a some of the parts approach where you're valuing each business segment separately. But I also think this begs the question, why do they keep parts of this business that are such low margin? Coca-Cola, for example, spun off its more capital intensive bottling operations into a separate company. And then let's get more into how the supply chain business even generates revenue and what that exactly means for them.

• 30:22Speaker 02

  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 franchisees. 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

• 31:07Speaker 02

  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.

• 31:35Speaker 01

  And just for context for the listeners, I read that in the supply chain centers, they're operating over 1,100 tractor trailers that supply more than 7,800 stores with dough and all the other complementary products needed to maintain Domino's quality. But one thing I wanted to flag here is that you mentioned earlier that Quiznos went through a lot of turmoil by forcing their franchisees to purchase their ingredients exclusively from them, add significant markup to what it would cost for them to just source the ingredients themselves from other suppliers. 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 franchisees and better balance that relationship?

• 32:21Speaker 02

  I'm glad you asked this, Sean, because I think it's really important in terms of maintaining a healthy relationship and how they've actually basically outlined the system. So from what I read, it doesn't appear that franchisees are required to buy from the Domino's 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 franchisees who purchase their food from the supply centers. So their disclosures say that they offer franchisees approximately 50% of the operating income from their supply chain operations. And I think this is actually pretty brilliant, because it means that if the franchisee increases how much of the product they are buying from the supply chain centers, they're also increasing their own share of the operating profits as part of that plan. So the disclosure mentions that franchisees voluntarily choose Domino's, meaning

• 33:06Speaker 02

  they could go elsewhere, but they wouldn't get the same benefits that they would get from a different supplier.

• 33:11Speaker 01

  I do think it is interesting because it seems like a quality control issue here that you wouldn't want to make optional, right? I would have assumed that franchisees didn't even have the choice to source ingredients elsewhere, that they would have had to order all their ingredients through the same supplier. So how does that work with their international locations, though, right? If they don't source their ingredients from the same suppliers, that's hard enough to do domestically. How do you manage that and maintain quality standards abroad?

• 33:40Speaker 02

  Yeah. So I actually have a really good story about this. So my wife, a couple of years ago, was traveling with her sister for a wedding a few years ago. And after the wedding, they ended up in Athens, Greece. And so while they were there, they went to a Domino's and she said, hands down, it was by far the best Domino's pizza that she'd ever had. And, you know, she's had Domino's with me in Vancouver, she's had it in Hawaii where she grew up. So she's had a lot of Domino's from all over the place. So it was really interesting that Athens, Greece, of all places, would have Domino's pizza that was the best that she ever ate. So I found this kind of interesting at the time because I was thinking, well, why? Why is it that Domino's halfway around the world is going to taste different than, you know, a Domino's right around my block? And I think I figured the answer to that since researching Domino's specifically for this episode. So internationally,

• 34:24Speaker 02

  Domino's has a whole bunch of franchises that are actually run by master franchisees. So they kind of offload a lot of that franchising to these master franchisees. And actually, plenty of these franchisees are publicly traded. You got Jubilant Food Networks in India, you got DPC Dash in China and Hong Kong, then you got Domino's Pizza Group in the UK. So in these cases, the master franchisees are actually building out their own supply chain centers. And this is part of the reason that they pay a lower franchise fee to Domino's. It's much more of a pure royalty play, but that's why the margins are so high.

• 34:55Speaker 01

  So there's actually a number of publicly traded entities tied to Domino's effectively. And I actually remember looking into Domino's Pizza Group in the UK after it was pitched on Value Investors Club a while back. But I didn't know they had these listings in these other countries, though.

• 35:10Speaker 02

  Yeah, surprisingly, there are actually over half a dozen publicly listed companies that are master franchisees. And I know I've actually run into a few people in the community in the past that were either interested or already invested in that UK master franchisee. While the numbers were somewhat interesting from my recollection, they were quite similar to the US franchiser and I just never ended up pulling the trigger.

• 35:30Speaker 01

  How about we shift topics here and discuss some of the competitive advantages that Domino's has? Because there is no way that Domino's would be able to have the scale it has without at least some kind of barrier to entry, or at least you would think. And even though technically anybody can open a pizza shop pretty much anywhere around the world. And after all, there is no patent on dough and cheese and pepperoni. So what is the special sauce that Domino's has that keeps customers coming back for more pizza?

• 36:00Speaker 02

  Yeah, it's funny you say that because I remember when I was researching for this episode, I remember seeing, I think it was the creator of Papa John's and he's bought something like $1,700 of pizza equipment and he basically scaled Papa John's from that. So it's kind of, that was kind of off putting, kind of like someone can come in and disrupt a business starting with $1,700. Well, clearly there's no barriers to entry, but obviously, like you just mentioned, for Domino's to scale up to over 22,000 locations, there's got to be something going on there. So I would say that Domino's definitely does have some competitive advantages. Some of them are obvious, some of them are less obvious. I think the less obvious ones tend to be more interesting. So let's just start there. The first advantage that Domino's has is something called they call fortressing. So instead of spacing their stores far apart in order to reduce cannibalization, which

• 36:44Speaker 02

  you kind of intuitively think makes sense, they actually take a completely different approach and purposely open stores that are closer and closer to each other. So the reason for this is that it helps maintain very, very high store level economics while actually improving the customer experience. But think of this from a customer's point of view, you know, instead of ordering a pizza from maybe 10 kilometers away, you can order from just two kilometers away. And that means that your pizza is going to arrive faster, it's going to arrive hotter. Or if you're thinking of doing carryout, then you're obviously much more likely to just visit that location that's in closer proximity.

• 37:15Speaker 01

  So with how easy it is to order a meal straight to your house using Uber Eats or DoorDash, why does it matter if Domino's itself is really close to you or not? And just in terms of delivery?

• 37:26Speaker 02

  Yeah, it's a valid concern, but I think Domino's has actually turned this risk into some sort of advantage. I'm very hesitant to say it's a competitive advantage, but some sort of advantage. So what they've done is they've got these multinational agreements with both Uber and DoorDash to get their product to their customers while also taking advantage of the network effects of those two apps, which are vast, vast, much more than Domino's would ever get on its own. So in Q2 2026 earnings call, CEO Russell Weiner said that they believe that they are the number one pizza company on both Uber and on DoorDash. Now, being number one should be an advantage as that hopefully means the algorithm is going to push more users towards Domino's when they want to look for pizza. But obviously, the algo can change based on customer preferences. Now, Domino's is

• 38:10Speaker 02

  different from most of the businesses that are located on either Uber or DoorDash. And that's because it actually uses its own delivery divers to deliver its product. So obviously, Domino's, yes, they pay them a fee to use their platforms, but they feel that it's worth it. Domino's actually sees the aggregators as another growth lever to onboard hopefully more and more customers into Domino's who normally wouldn't be Domino's customers. But I think part of Domino's moat isn't necessarily about aggregators like Uber or DoorDash, or whether, you know, Domino's own delivery services are good enough. I think you really need to look at the unit economics of a Domino's store because from a franchisee's perspective, they'll want to open a store that offers them the most amount of upside.

• 38:51Speaker 01

  I think we're seeing a theme here where over and over again, Domino's chooses to ensure quality over everything else, right? They could outsource delivery to Uber Eats drivers, like most restaurants do, but instead they choose to fulfill each of the deliveries through their own Domino's employees. So it's a no brainer to tie into Uber Eats and DoorDash as a way to reach more customers. But I don't know, I guess it's not totally clear to me how much of an advantage it is for Domino's to be fulfilling orders themselves rather than allowing third-party drivers to pick them up. Because it's not like Domino's drivers can drive faster or have some secret way to speed along the delivery. They're bound

• 39:30Speaker 01

  by the laws of the road and physics. So I'm not really sure how they justify this when they could save so much on labor costs by relying on fewer delivery drivers and outsourcing the whole process.

• 39:44Speaker 02

  Yeah, you make a really, really good point there, Sean. And it was really interesting because if you go back far enough, Domino's used to actually guarantee 30-minute deliveries. But unfortunately, they had a lot of drivers who were basically putting themselves at risk. And I think they had some fatalities and they essentially just had to completely get rid of that. So you're completely right. I mean, in terms of the speed, I think there's no difference between how fast Domino's can do it versus how fast a delivery driver can do it. But I think getting to your point there about customer service, I think that's what's really important. So I'm not sure, Sean, about how much luck you've had with delivery. I've actually personally had some pretty good luck, but my wife, oh my God, she's got some absolute horror stories. So one time she ordered food, I can't remember what it was, and the delivery diver essentially brought her food to someone else and then

• 40:26Speaker 02

  brought the other person's food to her. When they messaged the delivery driver about this, he was like, oh, I'm so sorry. I'm gonna go grab the food from the other person, bring it back, which he did. And when they opened the food up, it would literally was half eaten. And that's not it. You know, she's had food arrive like completely cold. She's had food that literally took two hours to come. And then she's had one event happen where the delivery driver came, dropped the food off. Five seconds later, they were basically texting her all annoyed because she hadn't tipped them like immediately after that they delivered the food. So needless to say, you know, my wife, she hasn't had very much luck. So I tend to do the ordering because I have much better luck than her. My guess here is that since Domino's is so focused on delivering the best possible customer experience, they

• 41:09Speaker 02

  just want to use their own drivers and their own system to help ensure that customers get their pizza delivery in a timely manner with absolutely minimal amounts of friction. So Domino's even has its own operating system, which they can use to help delay putting pizza in the oven if their pizza drivers are running a little bit late to ensure that the food is hot and fresh. Once that pizza gets delivered to their customers. So, you know, that's just my guess as to why they want to keep delivering pizzas in-house and rather than having third-party delivery drivers.

• 41:37Speaker 01

  Gosh, after hearing those horror stories, I think I'm pretty relieved that my experiences have been more mundane, but I can definitely imagine how a lot of things can go wrong with third-party food delivery. So getting back to something important here, which is looking at Domino's from the franchisees' point of view. If you wanted to open a new franchise, what really shapes the rationale for which brand you would go with? I mean, why choose Domino's over Pizza Hut?

• 42:06Speaker 02

  Well, if you're looking to open up a pizza franchise, you really have three really, really good options. Of course, there's other smaller ones, but the biggest ones are going to be Domino's Pizza, Pizza Hut, or Little Caesar's. So from some of the information that I could find on Pizza Hut, the average revenue is around a million dollars versus 1.4 million for Domino's. So based on an average investment of, let's call it $500,000 plus a one-time franchise fees, then the recurring fees on your revenue, you'll make somewhere around $165,000 in EBITDA annually. And in that case, you're looking at a payback period of about four to six years. Now, since these three companies have such a high share of the pizza market, there's a pretty good chance that someone would probably want to go with one of them if they wanted to open up a pizza franchise. And since the average

• 42:48Speaker 02

  Domino's makes 40% more revenue, you can see why a potential franchisee might choose Domino's over the others. And then if you're thinking about opening an independent store, well, you know, you skip all the advertising and scale benefits that Domino's has to offer. And that's not to say that an independent can't work. You know, obviously, Sean, I'm sure, I think you told me about a pizza place that's independent around your house that you usually use. But obviously, I think from someone opening it, there's a lot more risk to going the independent route versus going with the franchise route. And so like I mentioned, you know, if you go with the franchise route, you have that turnkey solution where they're kind of giving you the blueprint to how to succeed. Whereas if you go independent, well, you're figuring that all out completely on your own.

• 43:27Speaker 01

  And restaurants try to cultivate loyalty programs. And there are some diehard fans that are religiously loyal to one brand of pizza or cheeseburgers or whatever it is. And it sounds like you might've been a pretty diehard Domino's fan back in the day, but there's also still really no lack of alternatives either. I mean, you're not just competing with other pizza chains, but literally any food that someone could choose to buy. And also the option to cook at home if eating out becomes too expensive. With the point being, there is no customer lock-in like with Intuit QuickBooks, where a user might've run their company's bookkeeping through the QuickBooks software for decades in some cases. And that just makes it very, very hard to switch away from their platform. And if there's

• 44:11Speaker 01

  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 still am trying to understand, you know, what is it that really keeps customers coming back to Domino's?

• 44:30Speaker 02

  Yeah, there's, you know, definitely zero switching costs to ordering a pizza from somebody else. And yet Domino's, for whatever reason, keeps 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% 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 dominates in simplicity and probably to some degree in mindshare. 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.

• 45:10Speaker 01

  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 what Domino's, they have done a really good job in proving 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. And I want to make sure though, that we discuss a topic. I'm sure our audience knows you're very passionate about Kyle, and that is capital allocation and capital efficiency. So without looking at the numbers, my assumption is that the capital efficiency of a business like Domino's

• 45:54Speaker 01

  is pretty good, simply because the franchise model doesn't require a lot of investment from the corporate perspective, right? The franchisees are the ones putting up the money and the margins are super high, specifically on the franchise part of the business.

• 46:10Speaker 02

  Yeah, you're absolutely correct. And then to your point there on advertising, the franchisees 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 Domino's 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 the supply chain to their master franchisees. 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

• 46:52Speaker 02

  the last five years or so, which is frankly, mind boggling, especially for a business selling $12 pizzas. But we 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 NOPAT, 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.

• 47:22Speaker 01

  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 take away conclusions that your returns will come close to the historical number because there are a whole lot of variables involved. And one of them that really matters is the reinvestment rate. 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 Domino's has been taken, then while 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.

• 48:07Speaker 02

  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.

• 48:40Speaker 03

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• 51:45Speaker 01

  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 franchisees, which is what we were talking about earlier. And having that experience of directly running Domino's 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.

• 52:30Speaker 01

  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 negative $4 billion today. So maybe we can just paint some more color around how this happens for listeners.

• 53:12Speaker 02

  Yeah, this is a pretty strange wrinkle for Domino's. 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 and profits to reinvest part of it into its business, which then increases the equity. But this isn't part of Domino's capital allocation strategy. So under Domino's current strategy, given the fact the business doesn't require that much capital to run the business, they spent 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.

• 53:53Speaker 02

  Instead of reinvesting into the business, they are laser-focused on shareholder distributions, both in terms of buybacks and in dividends.

• 54:01Speaker 01

  One of my favorite examples of how far buybacks can take you is with AutoZone. And there's two ways to grow earnings per share. You grow the numerator by expanding your net income, or you shrink the denominator by buying back stock. And over the last 30 years, AutoZone has repurchased something like 90% of their shares outstanding. And that alone is going to drive a 10x in earnings per share before accounting for any net income growth. So buybacks can definitely be a very powerful strategy.

• 54:31Speaker 02

  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.

• 54:40Speaker 01

  Okay, let's hear it.

• 54:42Speaker 02

  So I like buybacks and dividends when a company doesn't require any 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 a very 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 repurchased 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.

• 55:22Speaker 01

  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 on 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 to be fair, it looks like they haven't done a massive one-off repurchase of shares since going back to 2022, which is maybe the right move. But buybacks and dividends are still continuing to increase.

• 56:05Speaker 01

  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.

• 56:14Speaker 02

  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 $1 billion in EBITDA. Their covenants state they must stay below 5.5x debt to adjusted EBITDA, which is a pretty high number in my books.

• 56:56Speaker 01

  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.

• 57:09Speaker 02

  Exactly. So you know, Domino'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-backed 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%, 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.

• 57:53Speaker 02

  They refinanced just last year just to pay back the principal on 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.

• 58:10Speaker 01

  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 asset-backed, they probably disagree about Domino's durability as a concern. They have to have a lot of faith in the business. And it gives Domino's a low-cost 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.

• 58:48Speaker 02

  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's 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 Rex Rich's 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

• 59:32Speaker 02

  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.

• 59:42Speaker 01

  It is pretty disappointing, especially when you consider that Berkshire Hathaway held about 10% of these shares at one point before exiting in the beginning of this year. And on the one hand, this didn't keep Berkshire from investing in Domino's, but it certainly didn't inspire them to keep holding on to that position either.

• 59:59Speaker 02

  Absolutely. So looking at the pay mix for the CEO, he makes about 9% of his total compensation as base salary. Now, 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 five 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

• 1:00:44Speaker 02

  total shareholder return. It's worth noting that the benchmark is not the S and P 500, but it's actually a restaurant sub-index of the S and P.

• 1:00:52Speaker 01

  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 EBITDA, where you're artificially creating a non-GAAP metric to measure earnings rather than using a more objective accounting standard.

• 1:01:14Speaker 02

  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 Wiener has taken over, you got compounding of revenues of about 3% and then earnings per share and EBITDA of about 5%. Another yellow flag that I think I have to mention here is that the majority of insider transactions over the last two years have been sales and a lot of these have been in the exercising of options. So in the last two 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% drawdowns and right now is coming off a 39% drawdown. It would be really great to see insiders taking advantage of this alongside other shareholders.

• 1:01:58Speaker 01

  It would, and I think we should get into this topic in a little more detail. I know the whole reason that 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?

• 1:02:14Speaker 02

  So the one that really kind of sticks out to me is the 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 was 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 Domino's 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, came in at just 0.1%

• 1:02:58Speaker 02

  in the US and it actually slightly declined by 0.1% internationally excluding foreign currency. So the market is currently seeing these declining numbers and not really taking into account any future growth at this time.

• 1:03:10Speaker 01

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

• 1:03:19Speaker 02

  Me too. You know, I get this has a royalty-like revenue and cash flow, which I guess is what the market was seeing back then. But you know, unlike a business like an AMT, which runs on these very long-term, multi-year contracts with meaningful switching costs, Domino's just doesn't have the same competitive advantages and still suffers when their customers are going through some tougher economic times. 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 that Domino's can go up to 5.5x leverage is pretty concerning to me, given the fact that the business is currently seeing these declines in its growth numbers. I'm hesitant to say that this business won't be around in the next few years, but if I look out maybe 20 years from now, I would say that I have zero conviction in saying that this business

• 1:04:03Speaker 02

  will still be around. With people, you know, moving to become healthier and the abundance of people on GLP-1 drugs, I think there's a large-scale movement away from foods that aren't as nutritious. Then you take into account that GLP-1 drugs are likely to actually decrease in price once we do have the generic versions. You know, it's hard to say more people are going to want to eat unhealthy foods. If anything, my assumption would be that it's probably a downward trend, but who knows exactly what the impact will be.

• 1:04:31Speaker 01

  And I can only speculate on what would happen if same-store sales growth continued to decline or their store count declines, but my guess is that their lenders would start getting nervous about what have otherwise been pretty generous debt covenants and this whole securitization approach that they've taken. And maybe they'll require either higher interest rates or more restrictive covenants in the future if they feel like the business is going through a slow deterioration. And you know, you also mentioned that the aggregators, Uber and DoorDash. And so I'm pretty curious to hear more about how food delivery apps you think have impacted Domino's takeout business.

• 1:05:10Speaker 02

  Yeah, I think at one point, the aggregators were proving to be a pretty serious problem and Domino's actually resisted them for quite a long period of time, but eventually they just caved in because I think they understood that they probably couldn't beat them at their own game. And I think this probably shows the strength of these businesses over the strength of, you know, just Domino's delivery business. So why is ordering through the aggregators bad for Domino's? First, the margins on this are just not as good as keeping it in-house. So in return for connecting their network to Domino's, Domino's is obviously paying them a fee on every single pizza or other food item that they deliver. And if customers aren't comfortable ordering from specifically Domino's app, it obviously reduces the chances that Domino's can then onboard them onto their own native app that

• 1:05:53Speaker 02

  offers rewards, but also has higher margins and they can bypass these fees that they have to pay to the aggregators. The other issue with using food delivery apps is who absorbs the margin compression? As I mentioned earlier with the Quiznos case study, if you're telling your franchisees to reduce margin in their business, well, then you run the risk of degrading the relationship with your franchisees.

• 1:06:12Speaker 01

  Intuitively, if Domino's is losing some of its higher-margin delivery business to Uber and DoorDash, then you would think that we would see company margins starting to compress unless your point, they are passing on costs to franchisees.

• 1:06:26Speaker 02

  Yeah, I thought so too. But actually, when I looked at their EBITDA margins, they're continuing to climb upwards. So right now, they're over 21% and that's up from 18% in 2018.

• 1:06:36Speaker 01

  So how do you interpret that? How have they managed to expand margins?

• 1:06:39Speaker 02

  I think they've expanded the margins for three primary reasons. So the first one here is that they've gotten a larger and larger increase in their share of franchisees over corporate-owned stores. So obviously, the franchise royalty fee, like I've already mentioned many, many times, carries much higher margins and therefore as they shift more and more to the franchise model away from the corporate-owned models, it lifts corporate margins up. Then second, you have the supply chain procurement advantages. Obviously, as they sell more and more pizzas, they have to increase the capacity of their supply chain, which I think probably gives them some scale benefits, which can positively impact their gross margins. Then third, here's just operating leverage. You know, opening more and more franchisees adds a lot of incremental revenue without adding too many incremental

• 1:07:21Speaker 02

  expenses. So I hope we didn't scare too many people off too badly with all the risks that we've talked about today, because this is still a business that has been around for a very long time, especially for a retailer in the food industry, an industry that is notoriously difficult to succeed in, let alone thrive in for multiple decades. So while Domino's, like any business, obviously has its risks, I think we should now discuss what they can do to get out of the current rut that they're in. So I mentioned earlier that Domino's has compounded its earnings per share at about 15% for the last two decades. While I definitely think that this type of growth is probably never going to happen again, I also think that they do have some abilities to at least further increase their intrinsic value. Even though I listed aggregators as a potential risk, it's obviously also

• 1:08:02Speaker 02

  a potential growth lever. While that growth will come with lower margins, sure, it's still a growth lever that Domino's wouldn't have if it just continued to leave itself off of the aggregators platforms. On top of that, management sees about $1 billion of incremental revenue just from being part of these aggregators.

• 1:08:18Speaker 01

  And that would be meaningful as they're currently around $5 billion in revenue. And so this would be a decent growth lever, yet if they want to grow for the next 10-plus years at meaningful rates, $1 billion in revenue is nice to have, but it's not going to turn this company back into being a fast grower by any means. So is there anything else that you think could move the needle?

• 1:08:40Speaker 02

  I'm not sure how much of a Domino's consumer you are, but their rewards program is another area where they've been working very, very closely on. So I liked the app back then because it told you when your pizza would be ready and it was always nice to just get a free pizza every now and then. I would say that when I was eating Domino's a little more regularly, that the rewards app was actually something that probably kept me in their ecosystem versus if they did not have one. So they currently have about 36 million reward members. The benefits that they list are improved personalization and customization, data collection, and improved customer benefits. It's actually really funny because I remember on Sundays, which was usually the day that I would order Domino's, I'd always get a push notification from the app telling me about what kind of deals that they are offering or simply reminding me that pizza might just be a good option

• 1:09:22Speaker 02

  to eat. So the app, I would say, kind of understood me at a pretty deep level and understood some of my customer preferences. And the Domino's Pizza rewards program would have gotten this data through seeing my own customer behavior and it probably added a couple of sales, at least for me, because they had access to that data.

• 1:09:39Speaker 01

  They seem like pretty decent growth levers, but I think you have probably left the most obvious one maybe, and maybe the most powerful one for last, which is simply to continue increasing the number of stores they have both in the US and globally. And I would imagine globally, there's a huge runway for opportunity.

• 1:09:55Speaker 02

  Yeah, you absolutely nailed it there, Sean. This is definitely going to be the biggest mover of future revenue growth, simply by just increasing the store count. So as of June 14th, 2026, the store count is around 22,500 and this number has been compounding at about 6% annually since 2012. The US now has over 7,000 stores. So I would say you're probably correct that the US market is probably pretty saturated. It is definitely the global presence where I think future growth and opportunity is going to come from. What I think they'll probably do is continue to maybe share the fortress strategy that I think they've really, really focused on the US with their international franchisees. And hopefully that will allow them to have more concentrated areas of franchisees

• 1:10:38Speaker 02

  to help them continue to grow. So I mentioned earlier how hard it is for restaurants to succeed, simply because tastes change over time. And Domino's has done a lot of work on this end over the years. You know, they completely changed their pizza recipes from the original, simply because their customers no longer liked it. They've also added some new items to their menus to try and draw new customers or keep existing customers coming back.

• 1:10:59Speaker 01

  I think it's pretty nice to see a willingness to adapt and innovate there. Changing your pizza recipe is actually a huge risk, even if sales were otherwise declining. I mean, you could easily accelerate the business's decline, but I also think that you have to be able to innovate and disrupt yourself to ward off corporate maturation and to keep growing steadily. And so companies that have done that to the extreme are Amazon and Alphabet, but to a lesser extent, yeah, Domino's has very much succeeded in staying relevant to the average consumer and also expanding their customer base over time. So I think they deserve credit for that, for sure. And, you know, pizza really is a lot better than it used to be. But I think it's that time of the episode where we try to figure out what

• 1:11:42Speaker 01

  Domino's intrinsic value is to a long-term shareholder.

• 1:11:47Speaker 02

  Yeah, let's do it. So my base case is very simple because Domino's, at its core, is a pretty simple business, which I really do like. Sell pizzas and hopefully more and more of them each year, expand the store count and increase the same-store sales by a very moderate, you know, low, single-digit number. So in my base case, I assume a revenue growth rate of about 5.5% over the next five years. While growth has decelerated a little below this in the past few years, I think they'll probably rebound a little bit with consumers still interested in pizza. And I assume that the move towards utilizing aggregators helps increase customer awareness, and that maybe they can keep some of these new customers around for the long term. I also think they stick with their new store openings target of, say, about 700 to 800 per year. I give them EBITDA margins of about 20.5%, which

• 1:12:31Speaker 02

  is in line with their current margins from the last 12 months. I wouldn't be surprised if they can maybe eke out a little higher EBITDA margin expansion from the continued winding down of corporate locations and maybe increasing its count of franchises, which, as we know, have a much higher margin profile. But to keep things safe, I just assume no real margin expansion. With that, I apply an EBITDA of 17x, apply 20% margin of safety, and that yields a value of about $383.

• 1:12:56Speaker 01

  And what about the assumptions that you would see for the bear and bull cases?

• 1:13:00Speaker 02

  So for the bear case, I assume that revenue decreases, and this is due to a decrease in demand suppressing same-store sales growth as well. To attract customers, Domino's would then have to lower the price of their pizza through things like promotions and sales, which would further depress margins. And since the economics of their stores now are not as good as before, new store openings growth rate would also decline. This means a further multiple compression as well. But under the bull case, we assume everything works out just incredibly well. The fortressing strategy in the US begins to show that it works internationally as well. They're able to move customers from the aggregator platforms to their own app, increasing customer loyalty at, again, these higher margins. International expansion goes even better than ever as master franchisees continue to grow the business along with the US, and they're able to open over 800 stores per year. In this case, margins

• 1:13:45Speaker 02

  will expand a little bit as well, and the business is still perceived as having some sort of decent growth potential. So the market gives it a multiple more in line with the business that's still growing, albeit at a decent clip with expanding margins. And by the way, if you want to play around with the numbers from this model, just subscribe to our intrinsic value newsletter, and you'll be linked to the model so you can change the numbers around if you disagree with my assumptions.

• 1:14:06Speaker 01

  I think it's always important to think through a bull and bear case. I feel like the bull case here is maybe optimistic for my tastes. I'm probably more sympathetic to the bear case because of the GLP-1 risk. I see a very tangible headwind there, and it's not as clear to me what would sort of be the tailwind that lifts them up to the bull case. So I probably have a bias toward being a bit pessimistic against Domino's.

• 1:14:33Speaker 02

  Yeah, that's fair. I think personally, Domino's is a very interesting business. Like I mentioned, I used to be a massive consumer, and my family still eats it every now and then, but I usually stay away as my stomach forces me to. But in reality, it's a business that just doesn't really have the most compelling competitive advantages. While they've done some really good things in terms of innovation, and they're willing to make some pretty large-scale changes to continue moving the business forwards, I still don't think I would be comfortable with it, given the scale that it now has. If you have these large swings in customer preferences, it's going to be hard to maintain the need for customers to eat, let's face it, not the healthiest food. And while they can always rely on the college-age demographic, once that demographic ages and is making more money, in my view, Domino's just becomes a much less attractive place to choose as

• 1:15:17Speaker 02

  a food option. Given that, I think this business is still expensive, and is probably unlikely to grow that much in revenue. And my base case is basically no expansion of margins over the multiple. I'm fine just taking a complete pass on Domino's.

• 1:15:30Speaker 01

  You know, I've been interested in Domino's a few times before, but I do have to say, I never dug into the details around their whole business securitization approach to debt financing. And it is a great way to lower your borrowing costs, but there is a real cost to it. You're mortgaging your best assets. And so these creditors get priority claims on the cash flows and can literally control how much cash is released to the parent company to ensure that they're paid back. And so, yeah, that is a turnoff for me. Management not having full discretion over the business's cash effectively, and, you know, that could very much impact their ability to do share buybacks or dividends in the future. And then on top of that, you have this lack of insider ownership. And

• 1:16:13Speaker 01

  then, like I said, there's really not an obvious catalyst for the business going forward. If anything, there's more obvious headwinds. And so, yeah, Domino's brand, I think, is really at odds with this movement toward eating healthier and GLP-1s, as we've both alluded to. So it's a pretty interesting case study, but unless it were a really bargain bin price, it's not something I would personally be invested in. Yeah, if we could get it at like eight times earnings, I would look at it, but not so much today. And so, while it looks like Domino's has this really stable royalty revenue stream, if the underlying franchises hit rough spots at the same time that Domino's has to roll over its debt,

• 1:16:55Speaker 01

  the sacrifices they've made to access cheaper debt financing will become more evident and will really hinder the company's ability to make shareholder distributions, as I mentioned a moment ago. And I think that would lead to the stock just absolutely getting punished.

• 1:17:12Speaker 02

  Well, that's all we have for you today, folks. But as per usual, I want to leave you with a quote, this one from Warren Buffett. "An economic franchise arises from a product or service that, one, is needed or desired, two, is thought by its customers to have no close substitutes, and three, is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby earn high rates of return on invested capital." Now, while I don't think Buffett was using the word franchise specifically in the way we would today when we think about a franchise like Domino's or Dairy Queen's or McDonald's, the point still stands. I would say that Domino's hits the first point on selling a product that is needed or desired, but I can't see how it fits into his other two

• 1:17:54Speaker 02

  criteria. And even on selling a product that is needed or desired, it's still not in the same boat as a business like Coca-Cola in terms of its durability and competitive advantages. Thanks for tuning in, and I'll see you next time.

• 1:18:05Speaker 00

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• 1:18:47Speaker 00

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