TIVP092 (Video): Domino's Pizza (DPZ): Is the Royalty Engine Still Running? w/ Kyle Grieve & Shawn O'Malley

24:00Find tickets in the full agenda at the intrinsic value conference.com. That's theintrinsicvalueconference.com. And if you'd rather join us as a member and get the conference plus the full weekend included, apply to the Intrinsic Value Mastermind at theinvestorspodcast.com slash mastermind dash application. All the links are in the show notes below. Hope to see you in New York. 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.

24:38So 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 and Domino's having started in the US, I would imagine that they view the US as their most important market. Is that right? That's completely correct. Since Domino's started in the US, it's by far its largest segment.

25:20And another thing that I like about Domino's is that even though they have roughly say 7 ,000 US franchise stores at the end of 2025, they're actually owned and operated by only 754 independent 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.

25:54Domino's clearly has a really good network of franchisees because the number that I just mentioned means the average franchisee in the US owns about nine locations, although they disclose that about 211 other US 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.

26:35Another 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 them stay focused and to prioritize the Domino's pizza stores that they already own. All right. So we got revenues so far from royalties, and then we have corporate advertising costs that sort of get passed on as an expense. And then you've got the corporate-owned stores Roseburg Domino's is directly operating them and capturing 100 % of the revenue generated. And I think that all makes sense. We also mentioned earlier the supply chain component side of things.

27:07And 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. 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, its supply chain or even its corporate-owned stores.

27:47So 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 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. It definitely makes things messy when different segments have such wildly different profit margins.

28:23And 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 sum 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 to how the supply chain business even generates revenue and what that exactly means for them.

28:58Right. 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 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.

29:33So I think the supply chain, it's not seen as a profit center. Obviously, it has these kind of lower margin profiles. But it's a very important function inside of Domino's. And that's really just guarantee that there's the right amount of quality and the right consistency in their overall product that the consumer will ultimately consume. So the interesting thing also to consider when you look at Domino's is that the supply chain isn't global. So the supply chain is only really in North America. So as of 2025, they have about 22 dough manufacturing and supply chain centers, two thin crust facilities and one vegetable processing center in the US.

30:05And then in Canada, they have five dough manufacturing and supply chain centers. 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 complimentary 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 at significant markups to what it would cost for them to just source ingredients themselves from other suppliers.

30:45And 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? 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.

31:20So 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 they could go elsewhere, but they wouldn't get the same benefits that they would get from a different supplier. I do think it is interesting because it seems like a quality control issue here that you wouldn't want to make optional, right?

31:52I 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? 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.

32:23And 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 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 a Domino's right around my block?

32:51And I think I figured the answer to that since researching Domino's specifically for this episode. So internationally, 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.

33:23It's much more of a pure royalty play, but that's why the margins are so high. So there's actually a number of publicly traded entities tied to Domino's effectively. And I 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. 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.

33:55While the numbers were somewhat interesting from my recollection, they were quite similar to the US franchisor and I just never ended up pulling the trigger. 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 pepperonis So what is the special sauce that Domino's has that keeps customers coming back for more pizza?

34:32Yeah, 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 if 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.

35:02Some 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 they call fortressing. So instead of spacing their stores far apart in order to reduce cannibalization, which 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.

35:30But think of this from a customer's point of view. 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 visit that location that's in closer proximity. 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? Yeah, it's a valid concern. But I think Domino's has actually turned this risk into some sort of an advantage.

36:03I'm very hesitant to say that 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, much more than Domino's would ever get on its own. So in their Q2 2026 earnings call, CEO Russell Wiener 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 gonna push more users towards Domino's when they wanna look for pizza.

36:35But obviously the algo can change based on customer preferences. Now, Domino's is 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 Domino's own delivery services are good enough.

37:11I 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. I think we're seeing a theme here where over and over again, Domino's chooses to ensure quality over everything else. 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.

37:53Because it's not like Domino's drivers can drive faster or have some secret way to speed along the delivery. They're bound 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. 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.

38:27So 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 driver essentially brought her food to someone else and then brought the other person's food to her.

38:57When they messaged the delivery driver about this, he was like, oh, I'm so sorry, I'm going to go grab the food from the other person and bring it back, which he did. And when they opened the food up, it literally was half eaten. She's had food arrive 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 immediately after that they delivered the food. So needless to say, my wife, she hasn't had very much luck.

39:29So I tend to do the ordering because I have much better luck than her. But the point being here, you know, my guess here is that since Domino's is so focused on delivering the best possible customer experience, they 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.

40:01So that's just my guess as to why they want to keep delivering pizzas in-house rather than having third-party delivery drivers. 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 franchisee's 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? Well, if you're looking to open up a pizza franchise, you really have three really, really good options.

40:43Of course, there's other smaller ones, but the biggest ones are going to be Domino's Pizza, Pizza Hut, or Little Caesars. 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.

41:18And since the average 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 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.

41:46And 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. Yeah. And restaurants shredded 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.

42:21and 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 have run their company's bookkeeping through the quickbook software for decades in some cases and that just makes it very very hard to switch away from their platform and if there's something new and exciting out there or a pizza available at a special discount even most fans of dominoes aren't go to exclusively eat at Domino's, recurring customers can change on a whim. So at a high level, I still am trying to understand, what is it that really keeps customers coming back to Domino's?

43:00Yeah, there's definitely zero switching costs to ordering a pizza from somebody else. And yet Domino's, for whatever reason, keep selling 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.

43:37You know what you'll get, and you'll know that it'll be delivered on time and fresh. I do think brand recognition is a real advantage for sure. But you do have to spend a lot on marketing to maintain that advantage. And Domino's certainly does do that as just a recurring cost of business. And it does help to have a decent product behind all that marketing. And with Domino's, they have done a really good job 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. I want to make sure, though, that we discuss a topic I'm sure our audience knows.

44:13You'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 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. 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.

44:52So yes, I mean, the franchise part of the business is really about as capital-ite 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 the last five years or so, which is frankly mind boggling, especially for a business selling$12 pizzas.

45:28But we do have to keep in mind that Domino's has some unique advantages, specifically on the denominator, on the invested capital part of the return on invested capital equation. So net operating profits after tax or 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. Well, it's probably not fair to say that these numbers are the result of financial engineering, but it is important when looking at ROIC to really break down the individual parts. And so you can't always look at ROIC and take away conclusions that your returns will come close to the historical number because there are a whole lot of variables involved.

46:13And 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 well, the reinvestment rate collapses and the incremental returns on capital are going to fall off. And that is what ultimately drives returns for shareholders in the future. Totally. So what I'm seeing with Domino's invested capital is that it's not shrinking, but it's rising very, very slowly, similar to the growth in their net operating profits after tax. And going forward, there's reason to believe that invested capital may continue to actually decline.

46:53And 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 they're getting rid of those stores. And this should make the business even more capital-light and could even improve working capital, although it's already quite a low number for them. I definitely think that Domino's as a corporation needs to run a number of stores themselves so that they stay in touch with the needs of franchisees, which is what we were talking about earlier and having that experience of directly running domino stores themselves.

47:27You can't just totally be a passive player on the sidelines, licensing out your brand. We also don't need maybe 300 stores to have some operational skin in the game either. So I'm sure they can generate a ton of cash by selling off some of these locations effectively. But again, you need to have ways to reinvest that capital And otherwise, you just get a cash heavy balance sheet, which is sort of a high class problem to have. But for shareholders, it's going to weigh on returns going forward because the interest rate on cash is low. And the whole point of being an equity investor is to own shares in a business that can deploy cash at higher rates of return than bonds or what you would be able to do yourself.

48:07So 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. 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.

48:50But I can assure you, you know, Domino's does make a lot of money. So in 2025, they made$600 million in profits. Now, generally speaking, you'd expect a company making that much money in profits to reinvest part of it into its business, which then increases the equity. But this isn't part of Domino's 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 spend about 2.3 % of the revenue on CapEx, which is a surprisingly low number for a retail restaurant. But I think that's part of the attraction of their business model.

49:21Instead of reinvesting into the business, they are laser focused on shareholder distributions, both in terms of buybacks and in dividends. 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.

49:59Absolutely. And at this stage of Domino's growth cycle, I think returning cash to shareholders does make a lot of sense. I do have a small gripe here though. Okay, let's hear it. So I like buybacks and dividends when a company doesn't require adding debt to pay them out. And if you look back, there have been multiple periods in Domino's history when they repurchase more shares and they actually generate it in free cashflow. 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.

50:36For 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. Well, it's just something you have to be careful about. I mean, in theory, if your stock is trading massively below intrinsic value, then levering up to buy back as much stock as possible is actually an excellent maneuver in capital allocation, but it's also not sustainable, evidently, to buy back more than you generate in cash flow. And by taking out debt, you're borrowing against your future earnings power.

51:13You'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 does look 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. And even now, it doesn't appear that Domino's has the cash to cover the amount of capital that they're distributing to shareholders. And this brings us back to the point I made earlier about Domino's Pizza being able to really increase its earnings per share over the years while only growing revenues in the mid-single digits.

51:52So over the last decades, like I mentioned, earnings per share has compounded 15 % while revenue is 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're generating approximately a billion in EBITDA. Their covenants state they must stay below 5.5 times debt to adjusted EBITDA, which is a pretty high number in my books.

52:26And the hope is that they can continue to issue debt against their revenue streams simply because those revenue streams are very, very durable. But still, that's not guaranteed, right? I mean, we're talking about a pizza company, not a utility business. Exactly. So, you know, Donald's obviously doesn't run a normal corporate balance sheet. It's financed through these whole business securitization. So instead of a typical, you know, just a revolver and term loan structure, Domino's leverages its own royalty streams, intellectual property, and supply chain distribution income. These are then pledged as collateral for asset-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.

53:06And 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. 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.

53:40You 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.

54:17And that's exactly what we've seen. That's right. So I mentioned Tom Monaghan at the beginning of today's episode, but I haven't really discussed too much about the current management team. Domino's is interesting because it has been through five different CEOs in its entire existence. And when you think about how long the business has been around for, that's actually a pretty decent average tenure, which generally notes a good culture. So today's CEO is Russell Wiener, who has been in the business for nearly 18 years. He's not really a regs to riches story as he didn't start with Domino's as just say a delivery boy or anything.

54:46But 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. to. Now, looking at insider ownership, I mean, it definitely leaves a lot to be desired for a company with a market cap of just$11.5 billion. Having less than 1 % of ownership from both executives and directors to me is really, really low. 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.

55:21And on the one hand, this didn't keep Berkshire from investing in dominoes, but it certainly didn't inspire them to keep holding onto that position either. Absolutely. So looking at the pay mix for the CEO, he makes about 9 % of his total compensation as base salary. This is pretty great to see as his total comp relies so heavily on performance, but his base salary was$925 ,000. So 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.

55:57I think I can safely say I'm not crazy about this metric. But on the other hand, this target has grown by about 10 % per year over the last five years. So at least they're giving them a target that should create hopefully some sort of growth and alignment with shareholders. The remainder of the incentives are based on things like retail sales growth and relative total shareholder return. It's worth noting that the benchmark is not the S &P 500, but it's actually a restaurant sub-index of the S &P. I think I like that more than 70 % of the potential comp package is tied to long-term performance metrics, but you'd certainly rather see those metrics being connected to earnings per share and not adjusted EBITDA where you're artificially creating a non-GAAP metric to measure earnings rather than using a more objective accounting standard.

56:44I couldn't agree more with you, Sean. So overall, 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.

57:16This 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. It would. And I think we should get into this topic in a little more detail. I know the whole reason Domino's became interesting for you was because of this drop in its share price. So how about you take me through what happened over the past few years that have causes decline. So the one that really kind of sticks out to me is a classic reduced growth rate hurdle that I think a lot of businesses tend to face just as they exist for a longer, longer period of time.

57:54So 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.

58:26So in Q2, 2026, it came in at just 0.1 % in the US, and it actually slightly declined by 0.1 % internationally, excluding foreign currency. So, you know, the market is currently seeing these declining numbers and not really taking into account any future growth at this time. It definitely explains the drop in the multiple, but I mean, wow, 40 times earnings for Domino's Pizza at the time, that seems insanely rich to me. 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.

59:11So if we examine risks a little more closely, I also think debt is one risk you certainly have to take into account. The fact Domino's can go up to 5.5 times 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 I have zero conviction in saying that this business 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.

59:46Then 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. 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.

1:00:21And 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 also mentioned 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. Yeah, I think at one point, the aggregators were proven 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.

1:00:56And 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 offers rewards, but also has higher margins.

1:01:27and 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. 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 margin starting to compress unless your point they are passing on costs to franchisees. Yeah, I thought so too.

1:01:59But 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. So how do you interpret that? How have they managed to expand margins? 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.

1:02:33Then 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 is just operating leverage. Opening more and more franchisees adds a lot of incremental revenue without adding too many incremental 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.

1:03:10So 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 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.

1:03:45On top of that, management sees about a billion dollars of incremental revenue just from being part of these aggregators. 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, a billion dollars 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? I'm not sure how much of a Domino's consumer you are, but the rewards program is another area where they've been working very, very closely on.

1:04:20So 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 were offering or simply reminding me that pizza might just be a good option to eat.

1:04:55So 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 sales, at least for me, because they had access to that data. 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.

1:05:28Yeah, 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 in the US with their international franchisees.

1:06:06and hopefully that will allow them to have more concentrated areas of franchisees 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. 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.

1:06:42I 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 the 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 Domino's intrinsic value is to a long-term shareholder.

1:07:20Yeah, 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 five and a half percent 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.

1:07:57I also think they stick with their new store openings targeted about, say, about 700 to 800 per year. I give them EBITDA margins of about 20.5%, which 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 17 times, apply 20 % margin of safety, and that yields a value of about$383.

1:08:28And what about the assumptions that you would see for the bear and bull cases? 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. And And obviously with this decline, I think you'd get the further multiple compression as well. But under the bull case, we assume everything works out just incredibly well.

1:09:01The 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 will expand a little bit as well as a business is still perceived as having some sort of decent growth potential. So the market gives it a multiple more in line with a business that's still growing, albeit at a decent clip with expanding margins.

1:09:32And 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. 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 taste. I'm probably more sympathetic to the bear case because of the GLP one 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 dominoes.

1:10:09Yeah, that's fair. I think personally dominoes 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 gonna be hard to maintain the need for customers to eat, let's face it, not the healthiest food.

1:10:44And 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 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 or the multiple. I'm fine just taking a complete pass on Domino's. Yeah, 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.

1:11:18And 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 that could very much impact their ability to share buybacks or dividends in the future. And then on top of that, you have this lack of insider ownership. And then, like I said, there's really not an obvious catalyst for the business going forward.

1:11:55If 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, 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.

1:12:44And I think that would lead to the stock just absolutely getting punished. 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.

1:13:24I 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 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. Just a quick note before you go, this episode would not be possible if it weren't for our friends at Fiscal AI. It's our complete stock research terminal that Daniel and I use on every single episode and with every company we dig into, pulling 20 years worth of financials, digging into segment data, grabbing quotes from the latest earnings calls, and making use of real-time institutional-grade data all in one place.

1:14:06And if you want to try it yourself, well, head to fiscal.ai slash T-I-V-P. That'll include 15 % off if you upgrade to a paid plan. That's fiscal.ai slash T-I-V-P. Thanks for listening. Thanks for listening to TIP. Follow the Intrinsic Value Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results.

1:14:46Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services, or advertisers do not constitute endorsements, and the Investors Podcast Network is not responsible for any claims made by them. Copyright by the Investors Podcast Network.

1:15:14All rights reserved. Thank you.