In November 2023, Domino’s Pizza (DPZ 0.02%) opened its 20,000th location — this one in New Delhi, India. It’s an incredible milestone for the company.
Back when Domino’s only had 14,000 locations, it was already selling around 1.5 million pizzas every single day. It wouldn’t be surprising if this global brand now sells over 2 million pizzas per day, pushing it to over 700 million annually. That’s a lot of pizza for the world’s biggest pizza company.
Except here’s the thing: Domino’s itself sells very little pizza. As of the end of 2023, 99% of all locations were owned by franchisees — independent business owners who pay for the right to use Domino’s branding and recipes. These franchisees make and sell most of the pizza.
If this pizza stock sells relatively little pizza, then how did Domino’s generate $4.5 billion in revenue in 2023? Well, just over 60% of this money comes from something most investors wouldn’t expect at all.
Here’s the big revenue driver for Domino’s
In 2023, Domino’s generated revenue of $2.7 billion from its supply chain business. The company leases over 1,000 tractors and trailers to regularly supply more than 7,400 of its restaurant locations with supplies and food-preparation equipment. It also provides some of the food, including vegetables and fresh pizza dough.
Using the supply chain for Domino’s is optional for franchisees. In 2023, roughly 200 additional locations started using the company’s supply chain. Indeed, there are strong incentives in place for franchisees to choose this path.
Domino’s generally shares 50% of its pre-tax supply chain profits with the restaurant locations using its supply chain. This deters the company from raising its prices too much on its franchisees since it would give back half of the profits anyway. And it encourages franchisees to join the system because they get a piece of the pie — pun definitely intended.
This arrangement leaves Domino’s with relatively little profit for its supply chain business. Its gross profit margin for this business segment was only 10% in 2023 — quite low. It’s always been low, and investors should expect it to stay this way.
But here’s why it would pursue this low-profit business in the first place: Domino’s is an attractive opportunity for franchisees. And attracting more franchisees is a very high-margin endeavor for the company.
Domino’s made $605 million in franchise fees and royalties in 2023. Not only was this a nice 9% year-over-year increase, this revenue is also pure profit.
In other words, Domino’s trudges through a low-margin opportunity to provide a valuable service to the independent business owners that are franchising its brand. By doing this, it attracts many franchisees to the system and generates a growing pure-profit revenue stream.
Why it matters for investors
For a company as big as Domino’s, its best days of growth are likely behind it. But it can still be a good investment because it has plenty of profits to give back to shareholders. The company regularly repurchases shares ($58 million in 2023) and pays a dividend ($170 million total in 2023). The chart below shows the long-term trends.
On Feb. 21, Domino’s management decided to raise its quarterly dividend by an exciting 25%. Therefore, the company has raised its dividend for the 11th consecutive year. And even still, it’s paying out a relatively small percentage of its profits, providing plenty of room for future increases in its dividend.
Moreover, Domino’s is already authorized to repurchase over $1.1 billion in shares at management’s discretion. That’s almost 7% of shares outstanding. That’s really encouraging for Domino’s shareholders today.
I’m not saying that this stock will crush the market over the next five or 10 years. But I am saying that its business model will likely keep its franchisees happy and allow it to continue to generate high-margin revenue for years to come. With those profits, management will likely reward its shareholders, which should generate positive returns over the long run.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Domino’s Pizza. The Motley Fool has a disclosure policy.