Warren Buffett Favorite Domino's Sees This as a Big Growth Driver, but Is the Stock a Buy?

While Warren Buffett's Berkshire Hathaway was unloading hundreds of millions of dollars worth of equities last year, one of the few stocks it was buying was Domino's Pizza (NASDAQ: DPZ). The largest pizza restaurant operator in the world, Domino's has a strong franchise and the type of global brand equity that Buffett likes to see in a consumer goods stock.

However, when the pizza giant reported its Q1 results on Monday, it failed to deliver growth on same-store sales in its home market. Its overall U.S. comparable-store sales declined by 0.5%, while company-owned restaurants same-store sales dropped by 2.9%. Notably, fewer than 300 of Domino's more than 7,000 U.S. locations are company-owned.

However, international same-store sales were strong, up 3.7%, and management did give investors a tasty morsel of news about something that could help fuel growth both later this year and beyond.

Expanding Delivery

Delivery has always been at the heart of Domino's business. In fact, many of its marketing slogans throughout the years have centered on its delivery business, starting with its famous "30 Minutes or Less, or It's Free" slogan and guarantee.

However, it is the outsourcing of some of its delivery business to third-party aggregators that is expected to help drive growth later this year and beyond. The company planted the seeds with Uber (NYSE: UBER) last year, which helped drive 3% of the pizza company's sales in 2024. Meanwhile, in early April, Domino's signed a partnership with DoorDash (NASDAQ: DASH), the largest food delivery service in the U.S.

During the Q1 earnings call, Domino's CEO Russell Leener said the company expects 50% incrementality with its DoorDash partnership -- in other words, it thinks that half the sales it makes through the DoorDash platform will be sales that it would not have captured otherwise.

DoorDash has a strong presence in suburban and rural markets, which Domino's hopes the delivery service will help it reach. Leener also noted that DoorDash gets twice as many pizza orders on its platform as Uber Eats, and as such, the company expects its sales contribution to be twice as large.

Domino's is currently testing DoorDash delivery through a small number of its locations and will launch the partnership nationally in May. Domino's is excited that this will closely coincide with what it calls "the biggest new menu item in [its] history, Parmesan stuffed crust pizza." It said stuffed crust pizza, which it debuted in March, went from being the biggest gap in its portfolio to one of its strongest offerings with this new menu item.

Growth outlooks

While Domino's has more than 21,000 locations, including more than 7,000 in the U.S., it still sees clear expansion opportunities. The company plans to open 175 net new locations just in the U.S. this year. It expects international store openings to be similar to 2024, when it opened 280 net new stores.

Image source: Getty Images

Turning to its Q1 results, overall revenue rose 2.5% to $1.11 billion while total global retail sales climbed 4.7% to $4.46 billion. Most of Domino's restaurants are owned by franchisees, and the latter number reflects systemwide sales at all locations.

Revenue growth was driven by higher U.S. franchise advertising revenue, higher supply chain revenue, and higher international franchise royalties and fees. The increase in U.S. franchise advertising revenue was due to a decrease in advertising incentives, while the supply chain revenue stemmed from due to a 4.8% food basket price increase to its franchised stores. The revenue number came up just short of the $1.13 billion analyst consensus, as compiled by Visible Alpha.

Adjusted EPS, meanwhile, rose 21% to $4.33, which was ahead of the $4.03 analyst consensus. The company generated $179.1 million in operating cash flow and $164.4 million in free cash flow in the quarter. It also repurchased $50 million worth of stock.

Domino's ended the quarter with net debt of nearly $5 billion. It has a 4.9 times leverage ratio (securitized debt related to its fixed-rate notes and borrowings under its variable funding notes, divided by adjusted EBITDA).

Looking ahead, the company said that its global retail sales growth should be similar to 2024. It is looking for U.S. same-store growth of around 3% and international same-store sales growth of between 1% and 2%. It expects the largest share of its U.S. same-store sales growth to happen in the latter part of the year, helped by the national launch of its DoorDash partnership. But management noted that a worsening macro environment could hinder Domino's from achieving the level of growth it's predicting.

Is Domino's stock a buy?

Trading at a forward price-to-earnings ratio (P/E) of just over 28 and with a high leverage ratio, Domino's stock is not cheap. However, heavily franchised quick-service restaurant operators can often carry premium valuations.

DPZ PE Ratio (Forward) data by YCharts.

The company has a strong opportunity with its new third-party delivery partnerships -- those services have been providing a nice growth driver for the food service industry. Given that Domino's has its own in-house delivery system, the impact might not be quite as significant, but given how strong these platforms are, it should still add nice incremental growth.

That said, I think that between its valuation and high leverage, Domino's stock looks pretty close to fairly valued at the moment. As such, I'd look to wait for a pullback before looking to buy shares.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Domino's Pizza, DoorDash, and Uber Technologies. The Motley Fool has a disclosure policy.