Domino Pizza's Morningstar Report

Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:43, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 23
Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
388.48 USD 392.00 USD 0.99 14.01 USD Bil Wide 5 Mid Blend Medium Exemplary ;;;;;
15 Sep 2023 25 Jul 2023 19:00, UTC 14 Sep 2023 6 Sep 2023 05:00, UTC
Price vs. Fair Value
Fair Value: 392.00

25 Jul 2023 19:00, UTC
800
Last Close: 388.48
600 Over Valued
Under Valued
400
200
0
2018 2019 2020 2021 2022 YTD
— 1.07 0.99 1.36 0.87 0.99 Price/Fair Value
32.40 19.51 31.59 48.15 -37.84 13.20 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 25 Jul 2023 19:00, UTC.
Contents
Business Description Domino's Remains Appropriately Positioned Despite Delivery
Business Strategy & Outlook (25 Jul 2023)
Bulls Say / Bears Say (25 Jul 2023) Pressures Across Restaurant Industry
Economic Moat (25 Jul 2023)
Fair Value and Profit Drivers (25 Jul 2023)
Business Strategy & Outlook Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023
Risk and Uncertainty (25 Jul 2023)
Industry changes espoused by COVID-19 changed little for digital-leader Domino's, which already
Capital Allocation (25 Jul 2023)
Analyst Notes Archive profited from a 70% digital sales mix, boasted a robust loyalty program, and maintained proprietary e-
Financials commerce and point-of-sale platforms. While the reopening of dine-in options has weighed on recent
ESG Risk results, the firm has taken 220 basis points of market share in the quick-service restaurant, or QSR, pizza
Appendix
category since 2019, seeing its share of global sales swell to 20.6% in 2022, according to Euromonitor
Research Methodology for Valuing Companies
data and our calculations. While we expect a turbulent couple of quarters, with evidence of consumer
Important Disclosure
trade-down and declining industrywide traffic, we view the firm's long-term emphasis on defending
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and franchisee profits, supporting its growing carryout business, and building store density at the market
Investment Research Policy. For information regarding conflicts of interest, please
visit: http://global.morningstar.com/equitydisclosures. level (fortressing) as prudent.
The primary analyst covering this company does not own its stock.
Considering these strategic touchpoints, Domino's' attention to operator profitability underpins some of
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1
Rating. the strongest store-level economics in the restaurant industry, despite rampant recent input cost
inflation. While the firm recently trimmed its global unit growth guidance, we view its new 5%-7%
global growth targets as achievable, underpinned by estimated cash on cash returns of 35%-40%, which
is among the best in our coverage. A commitment to value and convenience across the core menu
underpins customer traffic and strong average store sales, attracting further development interest,
while planned changes to incentivize carryout in the firm's loyalty program look prudent as pressured
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ß
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Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:43, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NEW YORK STOCK EXCHANGE, INC. Page 2 of 23
Sector Industry
t Consumer Cyclical Restaurants consumers shy away from delivery.
Business Description
We continue to view the firm's fortressing strategy as accretive to its quickly growing carryout business
Domino’s is a restaurant operator and franchiser with
(40% of sales) and development runway. The strategy features a host of benefits, from growing carryout
nearly 20,000 global stores across more than 90
international markets at the end of 2022. The firm mix to improving delivery time to disincentivizing competition, while increasing unit development
generates revenue through the sales of pizza, wings, potential in the firm's core markets at a minimal (0.5%) drag on comparable store sales growth.
salads, sandwiches, and desserts at company-owned
stores, royalty and marketing contributions from Taken together, we view the firm's strategy as cogent, positioning the firm effectively to compete in a
franchise-operated stores, and its network of 26 world where expanded consumer choice demands quality, convenience, and competitive pricing.
domestic (and five Canadian) dough manufacturing and
supply chain facilities, which centralize purchasing, Bulls Say Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023
preparation, and last-mile delivery for the firm's U.S. and u
Category-leading margins and compelling cash-on-cash returns should render Domino's 5%-7% global
Canadian restaurants. With roughly $17.7 billion in 2022
net unit growth targets attainable.
system sales, Domino’s is the largest player in the global
u The firm’s fortressing strategy allows it to capitalize on core competencies (price and convenience),
pizza market, ahead of Pizza Hut, Little Caesars, and
Papa John’s. cementing its leading role in the U.S. QSR pizza market, while growing carryout market share.
u Master franchise relationships continue to push impressive unit growth in underpenetrated markets like
Latin America, India, and China, which offer substantial space for greenfield development.
Bears Say Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023

u A return to dine-in traffic figures to pose a near-term headwind for Domino's, as a COVID-19 induced
delivery mix-shift abates.

u A widening value gap with the grocery store channel could exacerbate volume headwinds given the
viability of frozen pizza as a restaurant alternative.

u Increasing wage and commodity cost inflation may prove difficult to defray, requiring commensurately
higher levels of comparable sales growth to maintain steady margins—a particular challenge for
concepts like Domino's that compete predominately on value.
Economic Moat Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023

An intensely competitive restaurant industry, punctuated by minimal switching costs, evolving
consumer preferences, and constant innovation, makes carving out an economic moat difficult. The
operators that do so, in our view, focus on building an enduring brand by providing an excellent,
consistent customer experience, maintaining strict attention to franchisee profitability, and often by
building a scale-driven cost advantage in brand-level marketing, operational investments, and
procurement of food and paper products. Domino's fits these criteria, in our view, with the wide-moat
operator's economic returns supported by comparable sales growth in excess of peers, commanding
franchise level profitability, and impressive international portability--underpinned by the firm's
“fortressing” strategy and commitment to a lean, value-driven menu. These competitive advantages are
likely to endure through the 20-year horizon implied by our wide economic moat rating, in our view,
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Competitors
Domino's Pizza Inc DPZ McDonald's Corp MCD Yum Brands Inc YUM Restaurant Brands International Inc QSR
Fair Value Fair Value Fair Value Fair Value

392.00 285.00 139.00 95.00
Uncertainty : Medium Uncertainty : Low Uncertainty : Medium Uncertainty : Medium
Last Close Last Close Last Close Last Close
388.48 278.23 127.99 92.97
Economic Moat Wide Wide Wide Narrow

Currency USD USD USD CAD
Fair Value 392.00 25 Jul 2023 19:00, UTC 285.00 27 Jul 2023 22:53, UTC 139.00 15 Aug 2023 20:13, UTC 95.00 17 Aug 2023 17:35, UTC
1-Star Price 529.20 356.25 187.65 128.25
5-Star Price 274.40 228.00 97.30 66.50
Assessment Fairly Valued 15 Sep 2023 Fairly Valued 15 Sep 2023 Fairly Valued 15 Sep 2023 Fairly Valued 15 Sep 2023
Morningstar Rating QQQ15 Sep 2023 21:18, UTC QQQ15 Sep 2023 21:18, UTC QQQ15 Sep 2023 21:18, UTC QQQ15 Sep 2023 21:46, UTC
Analyst Sean Dunlop, Equity Analyst Sean Dunlop, Equity Analyst Sean Dunlop, Equity Analyst Sean Dunlop, Equity Analyst
Capital Allocation Exemplary Standard Standard Standard
Price/Fair Value 0.99 0.98 0.92 0.98
Price/Sales 3.08 8.47 5.25 4.61
Price/Book — — — 7.68
Price/Earning 29.36 25.64 25.86 20.97
Dividend Yield 1.22% 2.19% 1.86% 3.16%
Market Cap 14.01 Bil 207.52 Bil 36.90 Bil 29.81 Bil
52-Week Range 285.84—409.95 230.58—299.35 103.97—143.25 70.79—103.87
Investment Style Mid Core Large Core Mid Core Large Growth
embodied by forecast average adjusted returns on invested capital (including goodwill) of 49% through
2032, handily exceeding our weighted average cost of capital estimate of 6.9%.
Considering comparable sales, which we believe is an appropriate proxy for the ability to grow sales
ahead of inflation for value-focused operators (as it includes both price increases and increases in guest
traffic), Domino's performance has been impressive, with average annual comparable sales growth of
4.8% in the U.S. and 3.8% internationally over the past five years (2018-22). With U.S. food away from
home category inflation averaging 4.3% over the same period, we believe that Domino's brand cachet
provides sufficient sales leverage to outpace inflation and, by extension, to defend franchisee
profitability. The firm's comparable store sales outperformance has been reflected in its share of the
U.S. QSR pizza market, which has climbed to 20.6% in 2022 (according to Euromonitor), including 220
basis points of market share gains since the onset of COVID-19. Perhaps more importantly, the ability to
drive sales volume growth has improved Domino's cost structure, with incremental sales offering
leverage over largely fixed expenses such as payroll and occupancy costs at the store level, and over
corporate overhead at the operating company level. To this effect, Domino's higher order volume than
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peers allows the firm to maintain extremely competitive price points, earning money on sales volumes
rather than margin and providing a compelling value platform for customers in the pizza space--while
driving incremental orders, marginally improving the cost picture and perpetuating the demand
flywheel. That said, it has been interesting to observe the firm's approach to well-publicized freight,
wheat, and labor cost inflation during 2021 and 2022, with changes to the firm's $5.99 and $7.99 price
points (perhaps previously regarded as sacrosanct after a decade long run) suggesting that relative
value, rather than absolute value, might be the critical variable to monitor on an ongoing basis.
Comparable sales, which operate as "flows," accrue over time in higher average unit volumes ("stocks"),
allowing franchisees to generate more EBITDA at the same operating margin, thus improving their cash-
on-cash returns and underpinning a strong growth narrative. To this effect, Domino's sports higher
average unit sales than peers ($1.3 million in the U.S. against $1.2 million at Papa John's and $860,000
Pizza Hut, per Euromonitor and our calculations), resulting in impressive franchise-level EBITDA just shy
of $140,000 in 2022. While Domino's typically runs at stronger restaurant margins and lower buildout
costs than its competitors, strong store-level sales suggest a meaningfully higher franchisee return even
at identical margin structures and buildout costs, an advantage that we view as reflective of the firm's
strong brand.
Pivoting to franchise system health, we believe that the chain's commanding unit economics—with
unleveraged payback periods of roughly three years, against four-to-six years industrywide—make for a
strong, profitable system with appetite for incremental growth. In the firm's home market, we view a
commissary network and shared supply chain, intermediated through 26 domestic (and five Canadian)
dough manufacturing and supply chain centers, as strengthening the symbiotic relationship between
franchisor and franchisee even further. A profit-sharing agreement for the supply chain segment serves
to align incentives, with $110 million distributed to participating franchisees in 2022--suggesting
approximately 75% participation in the long-term shared-ownership arrangement. In the U.S. market, a
99% systemwide unit retention rate implies an average store life well beyond our 20-year wide-moat
horizon, and a marked preference for franchisors to have in-store experience further aligns incentives.
In the firm's international markets, key master franchise agreements with Domino's Pizza Enterprises,
Jubilant Foodworks, Domino's Pizza Group, and Alsea—which collectively operate more than half of the
firm's international units—undergird strength. The brand has proven strongly internationally portable,
with 13,200 units across more than 90 markets at the end of 2022 attesting to both a strong concept
and brand portability. With compelling payback periods, and a core menu (bread, cheese) that appeals
to the global palette, we believe that Domino's represents one of the most attractive concepts to
franchise for international operators, allowing the firm to maintain its impressive unit growth and,
critically, to invest through the business cycle. Those master franchise agreements offer further support
for a wide-moat designation, in our view, with categorical exclusivity (pizza) presenting a barrier to entry
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for the firm's chained competitors, while a low- to mid-single-digit royalty stream comes essentially
capital-free, with master franchisees covering build-out costs, advertising in local markets, and
providing the bulk of general and administrative support. Further, master franchise operators maintain a
better sense of customer demographics and preferences, incur fewer obstacles from unique local
regulation, and help the parent company avoid other common pitfalls associated with international
expansion. Tying the thread together, one of the most telling measures of franchise health is the
willingness to continue to open units, especially among operators like Alsea or Jubilant, whose brand
portfolios include competing names like Burger King, Dunkin', and Starbucks. The firm's 6% average
annual unit growth since 2018 serves as a proof point, handily outpacing Papa John's (1.1%) and Pizza
Hut (0.3%), attesting to the strength of the concept.
We also believe that Domino's maintains a scale-driven cost advantage, with the firm benefiting from
both favorable food procurement costs and leveraged advertising and technology expenditures across
its franchise network. The firm's strategy solidifies this edge, with fortressing—driving unit density
within markets—helping Domino's to shrink its service radius, shorten delivery times, improve route
density, and drive commensurately lower costs per delivery than its peers, an advantage that we believe
competitors will find difficult to replicate given their broader service areas and reliance on third-party
fulfillment services. More proximate stores have and should continue to drive both better route densities
and shorter delivery times, allowing the firm to generate leverage over driver wages and lower search
costs for labor. In our view, such improvements in route density become even more important in higher
wage environments, with $12 or $15 entry-level wages quickly eroding the delivery economics on a $20
order as distance from the store increases.
While Domino's is smaller than a few of the largest QSR chains (with $17.7 billion in 2022 system sales
rendering it the sixth-largest restaurant brand globally, excluding Seven & I Holdings, per Euromonitor),
a smaller food basket and in-house last mile delivery through the firm's commissary network likely allow
Domino's to carve out a cost edge relative to peers, in our view. The firm's commissary system
centralizes purchasing through the “Pie Perks” purchasing conglomerate, earning discounted prices on
foodstuff, restaurant equipment, payroll services, and repairs and maintenance—a view quickly
corroborated by looking at the stark difference between food distributors like Sysco's margins in their
respective QSR and independent restaurant operating segments. We also believe that Domino's
benefits from the ability to leverage advertising and technology investments across a broad store base,
investing some $485 million in brand advertising across the U.S. alone in 2022 and rolling out a slew of
technological innovations (the Pulse POS system, “anyware” ordering, and AI-driven pricing) with only
modest outlays by franchisees--$0.39-$0.40 per digital order, or about 2% of the firm's average ticket.
Considering the chain's technology prowess, we believe that Domino's relentless pursuit of core process
automation and data-driven decision-making strengthen its brand, with the firm's competitive
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advantage built around a database that features 20 years of customer data. Though we maintain our
view that most of the restaurant technology stack has largely been commoditized by third-party
software-as-a-service providers, Domino's custom Pulse POS, bespoke order sequencing algorithm, and
a series of operational innovations point to an edge for the global pizza behemoth. The firm's
commitment to innovation has been impressive, with delivery hot bags, airtight dough storage,
nontraditional delivery locations, high-speed ovens, Pulse, “anyware” ordering capabilities, driver
tracking, and AI-supported regional pricing and advertising decisions pushing constant operational,
financial, and customer experience improvements. Access to Pulse POS data since its rollout nearly 20
years ago strikes us as particularly advantageous, with customer order history, payment information,
dayparts, popular attach items, and promotional sensitivity offering a more complete view of the
customer than any competitor in the space. With more than 50% of global sales (70% of domestic sales)
coming through digital channels and top market share in the global pizza space, we believe that
Domino's access to customer data offers the potential for a level of customization, market-level pricing
optimization, and streamlined promotional activity that peers cannot emulate. Perhaps more important
than the maintenance of such a large dataset is its utilization--and the firm's commitment to making
data-driven decisions (A/B testing for advertisements, fortressing location strategies, menu innovation,
order sequencing, and pricing) strikes us as far more important than access to the data itself.
Fair Value and Profit Drivers Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023
After digesting first-quarter results, we're modestly increasing our fair value estimate for Domino's to
$392 from $385, broadly consistent with time value of money. On the positive side of the ledger, same-
store sales in the U.S. (flat) outperformed our expectation for a 1.5% contraction, and the firm's
partnership with Uber Eats should drive a modest uptick in near-term comp growth (we pencil in a 1.4%
cumulative lift over the medium term). The firm's value positioning, particularly in the carryout business,
should prop up results as consumers continue to seek value for the money, while changes to the loyalty
program that make it easier to accrue rewards should drive an improvement to the 4% collective traffic
and mix decline implied by second quarter results. On the negative side of the ledger, unit development
fell far short of our expectations, with 170 net new restaurants (against our 262 estimate) reflective of
ongoing permitting and construction delays and an uptick in net unit closures--a headwind we now
expect to persist through the back half of 2023. Our valuation implies price/ 2023 earnings of 28 times
and enterprise value/2023 EBITDA of 21 times, assuming a weighted average cost of capital of 6.9%.
Particularly in the delivery half of the business, consumers evidence a propensity to shift towards the
relatively cheaper grocery channel amid periods of economic stress, though pressures tend to be
relatively muted in the QSR pizza subsegment, which offers one of the best value propositions in the
restaurant industry (low cost to feed a family of four). Domino's is less well positioned than category
competitors for this cycle, however, with the firm seeing headwinds from a trio of factors; the reopening
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of dining rooms industrywide, sluggish delivery sales, and declining consumer health more broadly--
informing our quotidian 2023 forecast (1.6% annual U.S. comparable store sales growth). The carryout
business, unshackled by add-on costs like delivery charges and tips, looks better insulated in the current
macroeconomic environment, and we surmise that Domino's scale-driven cost advantage should allow
the firm to defend its value proposition and capture market share from smaller, less profitable
competitors over the next couple of years--particularly since the firm's franchisees appear to be in solid
health to invest through the business cycle (5%-7% net unit growth guidance over the three years to
come) despite pronounced current headwinds.
Key valuation drivers for Domino's include same-store sales growth, new unit openings, and restaurant-
level profitability. Given the unique dynamics of the franchise model, the firm maintains heightened
sensitivity to the results of its company-owned U.S. stores (4.3% of the U.S. footprint in 2022), which
represent roughly a third of U.S. segment revenue. We forecast average annual systemwide sales
growth of 7% through 2027, driven by comparable-store sales (2.6% in the U.S. and 3.1% abroad), new
unit openings (5.4%), and a small bump from more productive, smaller-format stores. This puts us
roughly in line with management's long-term targets of 4%-8% system sales growth and 5%-7% net
new unit growth, with our forecasts contemplating a positive inflection in 2025 and 2026 results as
restaurant profitability begins to normalize. Our base case assumes that restaurant-level margins
stabilize at 20.5% (a bit shy of prepandemic figures), with modest supply chain efficiencies and leverage
over occupancy costs partially offset by sticky wage inflation, remaining below historical high-water
marks in the low- to mid-20% range.
Given construction and permitting delays we expect the firm to hit $25 billion in system sales and
25,000 units by 2028 and 2027, respectively, behind initial 2025 targets.
Finally, we forecast a healthy increase in operating margin, to 19.6% in 2032, despite our expectation
that competitive pressure will intensify (as consumers see more options for delivery and return to full-
service dining), due to capital-light international segment revenue increasing more than a third of
operating profits in 2032, from 25% in 2022.
Risk and Uncertainty Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023
The restaurant industry is subject to intense competition, minimal switching costs, and changing
consumer preferences, contributing to execution risk for the operators in our coverage. While Domino’s
is subject to the same broader risk factors as peers (consumer balance sheet pressure, inflation in
nondiscretionary categories, elevated unemployment, and input cost inflation), it also maintains
exposure to the democratization of delivery, with third-party aggregators impinging on a growing market
that has historically been dominated by pizza concepts. Considering these factors in tandem with the
firm’s heavily franchised model—meaningfully reducing cash flow volatility—we assign the company a
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Medium Uncertainty Rating.
Among the more impactful risks facing the firm, in our view, is input cost inflation, particularly with
leisure and hospitality wages increasing by a high-single-digit percentage over the past year.
Restaurateurs have turned toward automation as a solution, with operations growing smaller (delivery-
oriented footprints), faster (digital ordering approaching one-click), and less dependent on labor
(pushing carryout over delivery, shrinking service radii, and automating repetitive tasks). Increasing
route density and pushing the higher-margin carryout business continue to remain important moving
forward, with competition for labor likely to remain stout, albeit perhaps less cutthroat than we've seen
over the past couple of years as aggregator growth slows.
On the environmental, social, and governance front, Domino's remains relatively less exposed than
peers, with our top concerns relating to human resource management. Working conditions in the
restaurant industry are notoriously difficult, marked by high turnover and low wages, with wage theft
and erratic scheduling not uncommon. To the extent that the firm is forced to lean on wage increases to
compensate for a difficult labor environment, restaurant-level profitability could be impacted.
Capital Allocation Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023

We assess Domino's capital allocation as Exemplary, with the firm's investments in a seamless digital
experience, data-driven decision-making, and operational technology underpinning our assessment. Our
capital allocation methodology considers capital allocation on a forward-looking basis, with pro forma
balance sheet health, investment decisions, and shareholder distributions all factored into our rating.
In our view, the firm's balance sheet health is average, with a large debt load (6 times debt/EBITDA at
year-end 2022) somewhat limiting Domino’s financial flexibility. Our model calls for an average of 19%
of EBITDA to be allocated toward net interest payments over the next five years, though the company’s
strong free cash flow to the firm (averaging 14% over the same period) offers more than adequate
coverage, in our view. We don't believe that Domino's sees meaningful default risk, attributable to the
relatively stable performance of quick-service restaurants, through economic cycles and a heavily
franchised structure--similarly franchised peers Restaurant Brands International and Yum Brands target
5-6 times net debt/EBITDA leverage--but note that larger debt service obligations could curtail the firm's
ability to invest in new company-owned stores, widespread unit remodeling, or even to raise capital for
strategic acquisitions. Nonetheless, staggered debt maturities see a negligible amount of principal come
due over the next three years, alleviating liquidity concerns, and the firm's effective interest rate of 3.9%
in 2022 doesn't seem to point to apprehension from debtholders. We appreciate the firm's approach to
leverage, with a flexible net debt/EBITDA target of 4-6 times designed to minimize the firm's cost of
capital based on prevailing market rates and interest deductibility. This is a shareholder-friendly strategy
that encourages management discipline, in our view.
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Turning to shareholder distributions, we have a mixed view of the firm’s philosophy. While Domino’s
has returned $3.7 billion to shareholders over the last five years (and we model a further $2.4 billion
through 2027), the bulk of distributions have come through share repurchases, too often at prices above
our fair value estimates. To the extent that the firm’s per share price exceeds our estimates, we’d prefer
to see capital returned through special dividends. We assess the magnitude of shareholder distributions
as appropriate, permitting ongoing investment in the brand through advertising and menu development,
new unit openings, and software development, and note that a historical dividend payout ratio of 35%-
40% puts the firm towards the middle of our restaurant coverage stack.
Finally, considering the investment strategy, we're encouraged by the firm's brand-strengthening
investments and recent operational innovations, underpinning our exceptional investment rating and
supporting our Exemplary capital allocation rating. We subscribe to the technology company
masquerading as a pizza vendor narrative, with investments like "anyware" ordering (satisfying
customers' pizza needs through home assistants, cars, smart TVs, smartwatches, and social media),
nonconventional delivery locations (landmarks, parks, and beaches), and automation of cash and
inventory management through the firm's Pulse point-of-sale system keeping Domino's resolutely ahead
of restaurant competitors, despite a surge in restaurant technology adoption over the past three years.
The Pulse system, initially rolled out in the U.S. nearly 20 years ago, offers Domino's unmatched insights
into customer ordering preferences, with popular dayparts, promotional sensitivity, menu item mixes,
and popular attach items driving AI-enabled pricing decisions on a regional basis and A/B testing for
promotions and advertisements. The firm’s dedication to franchisee profitability also appears well
placed, committing significant capital to operational improvements like car-side carryout (positioning the
firm to better compete with QSR drive-thrus), digital integration with the in-store make line, and GPS
tracking-driven order sequencing--improving delivery times, bolstering throughput, and ultimately
bolstering the brand. As a result, Domino's U.S. unit volume of $1.3 million in 2022 outpaced Papa
John's by nearly 10% and Pizza Hut by a sharp 50% based on our calculations and Euromonitor data.
Analyst Notes Archive
Domino's Earnings: Improving Margins and Not Uber Deal Represent Key Narrative; Shares Fairly
Priced Sean Dunlop, CFA, Equity Analyst, 24 Jul 2023
We believe wide-moat Domino's second-quarter key narrative ties to improving restaurant-level
profitability and flow-through implications for a recovery in unit development, not the firm's broadly
publicized deal with third-party delivery provider Uber Eats. To this effect, the pizza chain saw its
company-owned restaurant margins improve materially, swelling 220 basis points to 18.6% from 16.4%
in the year-ago period as food costs proved deflationary, while management guided to about an 8%
annual increase in franchisee EBITDA in the U.S. (to $150,000 per store) for the full year. As a
consequence, we believe that Domino's should be able to drive unit growth closer to the midpoint of its
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5%-7% target in 2024 (up from our prior low-5% expectation), with a strong correlation between
franchisee EBITDA and willingness to invest in new stores. As we digest results, we plan to incorporate
a modest bump from the firm's Uber Eats agreement—a 1.4% cumulative lift to same-store sales over
the next half decade—and a much quicker recovery to high-teens restaurant margins, raising our 2023
forecast for company-owned restaurant EBITDA margin to 18.2% from 16.1% as the firm's food basket
saw a 2.4% decline in annual pricing. The net effect is a planned low-single-digit percentage increase to
our $385 fair value estimate, leaving shares trading in a range we'd consider fairly valued.
Walking through results, Domino's reported solid second-quarter results, with EPS of $3.08 edging our
$2.85 estimates, while $1.03 billion in sales aligned closely with our prior forecast. Same-store sales
growth of 0.1% outpaced our estimates for a 1.5% decline, though traffic and mix collectively declined
about 4% annually, only modestly better than our estimated 5% decline industrywide. We continue to
expect stout near-term sales headwinds, a view corroborated by the firm's 3.5% drop in delivery same-
store sales, but remain optimistic on the chain's long-term prospects.
Restaurant Stocks Look Pricey As Demand Headwinds Remain Underappreciated Sean Dunlop, CFA,
Equity Analyst, 18 Jul 2023
Restaurant stocks look expensive as we take the industry's pulse, with names in our coverage trading at
a market-cap-weighted 10% premium to our intrinsic valuations. While demand has held up nicely to
date, we're seeing weak spots, with persistent declines in traffic and items per check suggesting price-
conscious consumers and a more challenging pricing environment to come. Nominal same-store sales
growth remains healthy, up around 5.7% industrywide over the past three months (RMS data), but
traffic (down 1.4%) and items per check (down 3.7%) remain points of concern. We expect slowing sales
momentum into the first half of 2024, resulting in a more promotional environment for the industry and
a three- to four-year route to normalized restaurant-level profitability. The industry's bargain bin looks
sparse, but we see modest upside in Wendy's and Starbucks shares, which trade at 6% and 2%
discounts to our $23 and $104 fair value estimates, respectively.
There are certainly positive takeaways from the most recent quarterly data, with wage growth slowing
to 5%-6% a year in leisure and hospitality and with commodity costs clocking in between deflationary
and disinflationary depending on restaurants' commodity baskets (median producer prices are projected
to fall nearly 6.5% in 2023, according to the U.S. Department of Agriculture). Therefore, we believe
restaurant margin performance likely bottomed during fourth-quarter 2022 for operators in our
coverage, with sticky menu price increases and easier annual comparisons for expense growth
providing near-term tailwinds. Nevertheless, as demand softens and the industry's promotional
environment intensifies, we expect little incremental improvement over the rest of 2023, underpinning a
challenging near-term operating environment for restaurateurs. We continue to view firms with strong
pricing power, heavily franchised systems, and strong digital platforms as best positioned to outperform
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in the current environment.
Domino’s: Uber Eats Deal Looks Intriguing but Not Transformational; We Maintain Our $385 FVE
Sean Dunlop, CFA, Equity Analyst, 12 Jul 2023
Wide-moat Domino's announced a partnership with narrow-moat Uber this morning to offer the pizza
chain's fare to Uber Eats customers globally. With our assessment that customer overlap between
delivery aggregators and the value-oriented chain is limited, in tandem with Uber Eats' relatively small
share of food delivery in the firm's largest U.S. markets (23% in February of this year, according to
Statista data), we don't expect the decision to prove transformational, and consequently don't expect to
move our $385 fair value estimate meaningfully. Shares shot up roughly 11% in intraday trading,
bringing the stock, which has long been our top restaurant pick, into a range we'd consider fairly
valued.
The deal marks a sharp turnabout from Domino's longtime resistance to aggregator platforms, though a
commitment to own-delivery and order tracking through its website should result in a very similar
customer experience. This does mean that the tie-up won't increase Domino's throughput capacity, but
suggests that the value of incremental delivery orders and access to aggregator-loyal clientele may
outweigh the risk of cannibalization. This comes as third-party marketplaces have grown increasingly
relevant and as delivery penetration has become a mainstay in the quick-service restaurant space,
reaching 18% of sales in 2022, per Euromonitor. We expect that outperformance to wane over the next
half decade, with Euromonitor projections suggesting U.S. delivery market growth (3.2% annual) should
fall short of our aggregate restaurant industry growth forecast (4.1%) after a COVID-19-induced surge,
exacerbated by consumers shifting toward cheaper fulfillment channels amid economic pressure.
We continue to remain cautious on the U.S. restaurant space in aggregate, with declining traffic and
increasing evidence of check management suggesting that market expectations for near-term results
look too aggressive.
Domino's Earnings: Soft Traffic and Delivery Headwinds Weigh Down Shares; We See Opportunity
Sean Dunlop, CFA, Equity Analyst, 27 Apr 2023
Domino's showed some signs of stabilization during its mixed first-quarter earnings, with 5.9% currency-
neutral sales growth and 7.9% growth in operating profit driving a sharp pre-market pop (6%-7%) before
earnings commentary drove a crushing share price reversal (down nearly 7% intraday). Traffic declines
during the quarter and persistent pressure in the delivery business were sub-optimal if not entirely
unexpected, with lower-income consumers trading out of the higher-cost delivery channel in favor of at-
home meals. As we digest results, we expect to lower our $397 fair value estimate by a low-single-digit
percentage due to expectations for top-line pressure to persist through the first half of 2024, in lieu of
easing earlier in that year, but we view shares as quite attractive for long-term investors at a high-teens
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(17%-18%) percentage discount to our revised intrinsic valuation.
More concretely, the wide-moat operator reported solid first-quarter earnings per share, with $2.93 in
diluted EPS edging our $2.67 forecast despite a narrow top line miss ($1.02 billion against our $1.03
billion estimate). Those results were underpinned by reasonable same-store sales growth—3.6% in the
U.S. and 1.2% in international markets (excluding foreign exchange)—a mix benefit from refranchising
114 stores, and strong administrative cost containment. We expect sluggish same-store sales growth
over the rest of the year, with Domino's lapping price increases in March and October of 2022.
Finally, while it was interesting to see the firm offer temporary 25-basis-point advertising royalty relief to
its U.S. market franchisees, we believe that the simultaneous move to raise digital per-order fees by
$0.08 (a lift of about 25%, adding roughly 30 basis points to franchise royalties moving forward) implies
that unit economics remain healthy. Despite near-term pressure, our long-term forecasts remain largely
intact, and Domino's remains our top pick in the U.S. restaurant space.
Restaurant Technology's New Dawn: Astute Adoption of Tech-Led Solutions Can Drive Meaningful
Returns Sean Dunlop, CFA, Equity Analyst, 3 Apr 2023
We believe that prudent adoption of digital ordering, restaurant software, and loyalty programs can
yield meaningful benefits for the restaurateurs we cover as well as for astute investors who can identify
today's digital leaders. We expect investments in technology to pave the way for food-service
establishments to gain share from the grocery channel, settling just north of 55% of U.S. consumer food
spending, ahead of our prior 50% estimate, as technology-driven cost savings enable restaurateurs to
narrow the value gap with the cheaper grocery channel. The largest chains in our coverage are poised
to disproportionately benefit from technology adoption; we forecast their share of total restaurant sales
to grow by 200 basis points over the next five years, with wide-moat firms like Chipotle, Starbucks, and
Domino's looking particularly well positioned. Investors looking for immediate-term opportunities should
consider Domino's and narrow-moat Toast, which trade at roughly 16% and 17% discounts to our $397
and $21.50 intrinsic valuations, though we'd remain eager buyers of leaders like Chipotle and Starbucks
at prices below our $1,550 and $103 fair value estimates.
While we see potential for long-term upside from restaurant hardware (robotics, autonomous delivery),
our research identifies strong digital ordering and delivery enablement, adoption of software solutions,
and the effective deployment of loyalty programs as the three most important near-term technology
priorities. Incremental sales from digital ordering could unlock $26 billion in market capitalization for our
coverage, by our estimates, while adoption of payroll, inventory management, and digital ordering
software solutions could allow operators to recapture 280 basis points of restaurant margin, reducing
dependency on price increases to bridge the 400-basis-point gap between current and long-term
margins as of the end of 2022.
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Domino's Guidance Gives Investors Indigestion; We See Strong Forward Prospects and Buying
Opportunity Sean Dunlop, CFA, Equity Analyst, 23 Feb 2023
Wide-moat Domino's trimmed its three-year systemwide sales growth (now 4%-8%, from 6%-10%) and
unit development (to 5%-7%, from 6%-8%) guidance this morning, sending share prices tumbling 11%
on the initial reaction. We believe that the market's concerns are overblown, with the pizza chain's
admission validating our prior thesis; worse restaurant-level profitability in tandem with higher
construction and financing costs should drive a medium-term contraction in unit development for most
operators--Domino's is simply our first company to publicly admit it. We expect only modest changes to
our own estimates, which now contemplate 7% and 6% annual system sales and unit growth through
2025 (from 8% and 6%), respectively, leaving our $397 fair value estimate effectively unchanged.
The firm's quarterly results were mixed, with $1.39 billion in sales aligning with our forecast, though
$4.43 in diluted EPS narrowly missed our $4.66 estimate. Strong cost containment on the G&A side (we
forecast growth of just 3%-4%) in tandem with the margin accretion from refranchising 114 stores
should drive modest operating margin expansion in 2023, by our estimates, with our 2023 forecasts now
contemplating growth of 0.6%, 5.3%, and 1.6% in sales, operating profit, and diluted EPS, respectively.
The year figures to be challenging for restaurateurs, with our expectations for limited pricing power as
consumers navigate inflationary headwinds suggesting very limited restaurant margin recapture.
We view consumer trade down from the firm's premium delivery channel as unsurprising and continue
to see its carryout business (now representing 40% of U.S. sales) as the key growth engine. Domino's
compelling four-wall economics should defend its growth narrative, with cash ROI around 35% and
strong international uptake remaining alluring. With shares trading at about a 20% discount to our
intrinsic valuation intraday, Domino's remains our top pick in the restaurant industry. K
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Competitors Price vs. Fair Value
McDonald's Corp MCD
Fair Value: 285.00

27 Jul 2023 22:53, UTC
400
Last Close: 278.23
300 Over Valued
Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
0.93 0.90 0.91 1.12 1.07 0.98 Price/Fair Value
5.60 13.95 11.14 27.37 0.42 7.31 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 27 Jul 2023 22:53, UTC.
Yum Brands Inc YUM
Fair Value: 139.00

15 Aug 2023 20:13, UTC
200
Last Close: 127.99
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
1.02 0.92 1.03 1.18 1.01 0.92 Price/Fair Value
14.40 11.41 9.64 29.75 -6.12 1.35 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 15 Aug 2023 20:13, UTC.
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Restaurant Brands International Inc QSR
Fair Value: 95.00

17 Aug 2023 17:35, UTC
200
Last Close: 92.97
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.87 0.87 0.91 0.91 1.00 0.98 Price/Fair Value
-4.66 19.79 -2.61 2.00 17.87 7.86 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 17 Aug 2023 17:35, UTC.
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Morningstar Historical Summary

Financials as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Mil) 1,802 1,994 2,217 2,473 2,788 3,433 3,619 4,117 4,357 4,537 2,049 4,510
Revenue Growth % 7.4 10.6 11.2 11.6 12.8 23.1 5.4 13.8 5.8 4.1 -1.3 2.1
EBITDA (USD Mil) 340 381 438 493 567 629 693 792 890 851 400 871
EBITDA Margin % 18.9 19.1 19.8 19.9 20.3 18.3 19.2 19.2 20.4 18.8 19.5 19.3
Operating Income (USD Mil) 314 345 405 454 521 572 629 726 780 768 373 798
Operating Margin % 17.4 17.3 18.3 18.4 18.7 16.7 17.4 17.6 17.9 16.9 18.2 17.7
Net Income (USD Mil) 143 163 193 215 278 362 401 491 510 452 214 473
Net Margin % 7.9 8.2 8.7 8.7 10.0 10.5 11.1 11.9 11.7 10.0 10.5 10.5
Diluted Shares Outstanding (Mil) 58 57 56 50 48 43 42 40 38 36 36 36
Diluted Earnings Per Share (USD) 2.48 2.86 3.47 4.30 5.83 8.35 9.56 12.39 13.54 12.53 6.02 13.23
Dividends Per Share (USD) 0.80 1.00 1.24 1.52 1.84 2.20 2.60 3.12 3.76 4.40 2.42 4.62
Valuation as of 31 Aug 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 2.3 2.8 3.0 3.4 3.4 3.3 3.5 3.9 5.0 2.8 2.7 3.1
Price/Earnings 29.7 33.8 35.3 39.8 36.1 31.7 32.8 32.9 42.9 28.0 26.0 29.2
Price/Cash Flow 22.5 25.8 26.2 28.2 26.7 29.0 28.2 28.3 30.7 25.1 23.7 24.5
Dividend Yield % 1.15 1.06 1.11 0.95 0.97 0.89 0.89 0.81 0.67 1.27 1.37 1.19
Price/Book -2.9 -4.1 -4.8 -4.0 -2.9 -3.4 -3.9 -4.7 -5.0 -2.8 -2.8 -3.3
EV/EBITDA 15.9 17.7 17.3 20.0 20.0 21.5 21.7 24.1 28.7 20.6 0.0 0.0
Operating Performance / Profitability as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 28.5 29.0 27.6 28.3 35.8 41.5 35.0 33.3 31.5 27.6 13.4 29.0
ROE % — — — — — — — — — — — —
ROIC % — — — — — — — — — — — —
Asset Turnover 3.6 3.6 3.2 3.3 3.6 3.9 3.2 2.8 2.7 2.8 1.3 2.8
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % — — — — — — — — — — — —
Equity/Assets % — — — — — — — — — — — —
Total Debt/EBITDA — — — — — — — — — — — —
EBITDA/Interest Expense 3.8 4.4 4.4 4.5 4.6 4.3 4.6 4.6 4.6 4.3 4.4 4.4
Morningstar Analyst Historical/Forecast Summary as of 25 Jul 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 12-31-2022 2021 2022 2023 2024 2025
Price/Sales 4.7 2.7 3.0 2.9 2.7
Revenue (USD Mil) 4,357 4,537 4,481 4,746 5,060 Price/Earnings 41.6 27.6 28.2 24.4 23.1
Revenue Growth % 5.8 4.1 -1.2 5.9 6.6 Price/Cash Flow — — — — —
EBITDA (USD Mil) 890 848 877 917 979 Dividend Yield % 0.7 1.3 1.3 1.4 1.6
EBITDA Margin % 20.4 18.7 19.6 19.3 19.3 Price/Book -5.1 -3.0 -3.4 -3.4 -3.5
EV/EBITDA 28.7 20.7 21.4 20.5 19.2
Operating Income (USD Mil) 781 747 821 842 900
Operating Margin % 17.9 16.5 18.3 17.7 17.8
Net Income (USD Mil) 511 452 491 557 579
Net Margin % 11.7 10.0 11.0 11.7 11.5
Diluted Shares Outstanding (Mil) 38 36 36 35 34
Diluted Earnings Per Share(USD) 13.55 12.53 13.80 15.90 16.80
Dividends Per Share(USD) 4.00 4.40 4.84 5.49 6.26
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ESG Risk Rating Breakdown
Exposure Subject Subindustry (42.0) u Exposure represents a company’s vulnerability to ESG

Company Exposure1 40.2 risks driven by their business model
40.2
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 37.6 Medium
2 0 55+ specified at the company level
Unmanageable Risk 2.5
Low Medium High u Scoring ranges from 0-55+ with categories of low, me-
dium, and high-risk exposure
Management
u Management measures a company’s ability to manage
Manageable Risk 37.6 ESG risks through its commitments and actions
29.1%
– Managed Risk3 11.0 Average
u Management assesses a company's efficiency on ESG
Management Gap4 26.7 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 29.2 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

29.19
Medium
Negligible Low Medium High Severe ESG Risk Rating is of Sep 06, 2023. Highest Controversy Level is as of Sep 08,
2023. Sustainalytics Subindustry: Restaurants. Sustainalytics provides
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Morningstar with company ESG ratings and metrics on a monthly basis and
risks, by evaluating the company’s ability to manage the ESG risks it faces. as such, the ratings in Morningstar may not necessarily reflect current
Sustainalytics’ scores for the company. For the most up to date rating and
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by more information, please visit: sustainalytics.com/esg-ratings/.
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 29.1% 4. Management Gap assesses risks that are not
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 06 Sep 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
Domino's Pizza Inc 40.2 | Medium 0 55+ 29.1 | Average 100 0 29.2 | Medium 0 40+
McDonald's Corp 42.5 | Medium 0 55+ 41.5 | Average 100 0 26.0 | Medium 0 40+
Yum Brands Inc 40.2 | Medium 0 55+ 52.7 | Strong 100 0 20.1 | Medium 0 40+
Restaurant Brands International Inc 43.7 | Medium 0 55+ 49.5 | Average 100 0 23.5 | Medium 0 40+
Wingstop Inc 36.7 | Medium 0 55+ 24.5 | Weak 100 0 28.1 | Medium 0 40+
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Appendix
Historical Morningstar Rating
Domino's Pizza Inc DPZ 15 Sep 2023 21:18, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
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McDonald's Corp MCD 15 Sep 2023 21:18, UTC
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Yum Brands Inc YUM 15 Sep 2023 21:18, UTC
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Restaurant Brands International Inc QSR 15 Sep 2023 21:46, UTC
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Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
Stage II: Fade
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
The second stage of our model is the period it will take
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
the company’s return on new invested capital—the re-
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
turn on capital of the next dollar invested (“RONIC”)—to
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
decline (or rise) to its cost of capital. During the Stage II
ally standardized, proprietary discounted cash flow, or
Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
DCF, modeling templates. We use scenario analysis, inde-
more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
pth competitive advantage analysis, and a variety of other
for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
analytical tools to augment this process. Moreover, we
those in which we have very high confidence that excess length of the second stage depends on the strength of
think analyzing valuation through discounted cash flows
returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
presents a better lens for viewing cyclical companies,
likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
high-growth firms, businesses with finite lives (e.g.,
a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
mines), or companies expected to generate negative
value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
earnings over the next few years. That said, we don’t dis-
see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
miss multiples altogether but rather use them as support-
cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
ing cross-checks for our DCF-based fair value estimates.
new invested capital (RONIC), and the number of years
We also acknowledge that DCF models offer their own
When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
challenges (including a potential proliferation of estim-
whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
ated inputs and the possibility that the method may miss
stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
shortterm market-price movements), but we believe these
financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
negatives are mitigated by deep analysis and our
text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
longterm approach.
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
cumulative or midcycle basis. If we deem the probability second stage.
Morningstar’s equity research group (”we,” “our”) be-
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
the company as possessing an economic moat. Stage III: Perpetuity
future cash flows it can generate. The Morningstar Rating
Once a company’s marginal ROIC hits its cost of capital,
for stocks identifies stocks trading at a discount or premi-
2. Estimated Fair Value we calculate a continuing value, using a standard per-
um to their intrinsic worth—or fair value estimate, in
Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
Morningstar terminology. Five-star stocks sell for the
firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
biggest risk adjusted discount to their fair values, where-
on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
as 1-star stocks trade at premiums to their intrinsic worth.
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
assessment of the firm’s economic moat, (2) our estimate
firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
of the stock’s fair value, (3) our uncertainty around that
creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
fair value estimate and (4) the current market price. This
value of expected future cash flows. Because we are
process ultimately culminates in our singlepoint star rat-
Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
ing.
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
1. Economic Moat Stage I: Explicit Forecast
weighted average of the costs of equity, debt, and pre-
The concept of an economic moat plays a vital role not In this stage, which can last five to 10 years, analysts
ferred stock (and any other funding sources), using ex-
only in our qualitative assessment of a firm’s long-term make full financial statement forecasts, including items
pected future proportionate long-term, market-value
investment potential, but also in the actual calculation of such as revenue, profit margins, tax rates, changes in
weights.
our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
3. Uncertainty Around That Fair Value Estimate
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company’s intrinsic
Morningstar Equity Research Star Rating Methodology
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
ß
thing that can affect our ability to accurately predict Morningstar Equity Research Star Rating Methodology
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the
purchase of the shares. In addition, the Uncertainty Rat-
ing provides guidance in portfolio construction based on
risk tolerance. Once we determine the fair value estimate of a stock, we justed return is highly likely over a multiyear time frame.
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme. lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium
serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Our star ratings are guideposts to a broad audience and Other Definitions
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be- quality of management’s capital allocation, with particu-
low: lar emphasis on the firm’s balance sheet, investments,
Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad- and shareholder distributions. Analysts consider compan-
ß
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
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Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
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cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
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Capital Allocation (or Stewardship) analysis published pri- analysis of the assumptions used in our determining a fair
or to Dec. 9, 2020, was determined using a different pro- value price. Where this report is made available in a language other
cess. Beyond investment strategy, financial leverage, and than English and in the case of inconsistencies between
dividend and share buyback policies, analysts also con- the English and translated versions of the report, the Eng-
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tions, and accounting practices in the rating. associated with any part or section of a report that has
Unless otherwise provided in a separate agreement, re-
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Sustainalytics ESG Risk Rating Assessment:The ESG Morningstar, Inc., or the Equity Research Group guaran-
try in which the Morningstar distributor is based. Unless
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stated otherwise, the original distributor of the report is
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Morningstar Research Services LLC, a U.S.A. domiciled
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Sustainalytics’ ESG Risk Ratings measure the degree to tries and/or jurisdictions (“Territories”) by independent
which company’s economic value at risk is driven by en- third parties or independent intermediaries and/or distrib-
This report is for informational purposes only and has no
vironment, social and governance (ESG) factors. utors (“Distributors”). Such Distributors are not acting as
regard to the specific investment objectives, financial
situation or particular needs of any specific recipient. This agents or representatives of the analyst, Morningstar,
Sustainalytics analyzes over 1,300 data points to assess a Inc. or the Equity Research Group. In Territories where a
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investor. Therefore, investments discussed and recom-
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Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:43, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 23

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Price vs. Fair Value

Fair Value: 392.00

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Bears Say Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023

delivery mix-shift abates.

viability of frozen pizza as a restaurant alternative.

Economic Moat Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Fair Value Fair Value Fair Value Fair Value

Economic Moat Wide Wide Wide Narrow

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Medium Uncertainty Rating.

Capital Allocation Sean Dunlop, CFA, Equity Analyst, 25 Jul 2023

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Analyst Notes Archive

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

in the current environment.

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

(17%-18%) percentage discount to our revised intrinsic valuation.

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Competitors Price vs. Fair Value

McDonald's Corp MCD

Fair Value: 285.00

Yum Brands Inc YUM

Fair Value: 139.00

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Restaurant Brands International Inc QSR

Fair Value: 95.00

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

Morningstar Historical Summary

Valuation as of 31 Aug 2023

Morningstar Analyst Historical/Forecast Summary as of 25 Jul 2023

Domino's Pizza Inc DPZ QQQ 15 Sep 2023 21:18, UTC

ESG Risk Rating Breakdown

Exposure Subject Subindustry (42.0) u Exposure represents a company’s vulnerability to ESG

dium, and high-risk exposure

Management Gap4 26.7 100 0 programs, practices, and policies

Overall Unmanaged Risk 29.2 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

McDonald's Corp MCD 15 Sep 2023 21:18, UTC

Yum Brands Inc YUM 15 Sep 2023 21:18, UTC

Restaurant Brands International Inc QSR 15 Sep 2023 21:46, UTC

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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