Domino’s Pizza: Hold the pepperoni

We initiate coverage of Domino’s with a HOLD rating. Domino’s Pizza is the world’s largest pizza chain. In the world of quick service restaurants, it is distinguished by i) it’s delivery/eat-out-first model and ii) the cheapness of its offering. For a long time, the leading pizza chain in the world was Pizza Hut. Pizza Hut was an eat-in concept. Delivery was secondary. Dominos made delivery primary and benefitted from cheaper store fit-outs (no dine-in floorspace, practically) and a pre-Uber Eats shift in consumer preferences to delivered food. Like its competitors Dominos largely franchises out, collecting a franchise fee and acting as the largest supplier to its stores (dough, cheese, toppings, etc). The delivery-forward model has faced some challenges as of late, as fuel prices and staff shortages eat into franchisee’s razor-thin margins.

McDonald’s Corp: Flip this Burger for now

We initiate coverage of McDonald’s with a NEUTRAL rating. As we wrote in our report on Starbucks, we like the quick service business because the set-up costs are relatively low, and the return is relatively high. Well-known brands are easier to sell; everyone knows what McDonald’s is. There’s a high degree of predictability baked into the model. We especially like McDonald’s because it is really a real estate company. The company owns roughly 70% of the buildings and 45% of the land of McDonald’s locations worldwide (excl. Russia). Franchisees pay a percentage of gross revenue (~10.7%) as rent and another percentage (~4%) as a franchise fee. The fact that McDonald’s sells burgers is incidental – it is a highly effective driver for franchisees to pay rent to the parent company.