DMP Charts, page-318

Firstly I just want to reiterate that I first stated my general argument when DMP was trading in the $50-55 range. Not to gloat, but just to say that so far the thesis has been correct and certainly if anyone listened I assume they would have been much happier buying at current levels than in the $50 level.

However, we are discussing current DMP so enough of the past. I believe you are of the opinion that the bottom is now and that the mid term future is to trade back into the $40s. My position is that we are about halfway to the bottom and predict that the price will be trading in the mid teens by end of this calendar year, barring some type of global macro miracle.

I have been closely observing the price of pizzas from both Dominos and Pizza Hut. Other metrics I track are google advertising, customer store reviews (yes I have been reading the foreign store reviews also), social media posts (there was a large discussion started on reddit about the state of Aussie pizzas just last week), parliamentary inquiries, real estate listings. I also study the actions of the corporate bodies behind the brands.

If I could crudely condense my finding into a brief summary it would be to say that there has been an obvious decrease in the strength of the Dominos brand in the last 3 months, but particularly since the new year. Looks like just in the last 24hr they have started doing 2 pizzas and 2 sides for $20.

The timing of these developments actually gives your thesis a fair bit of support. We could assume that These developments are unlikely to affect the upcoming results too much. Hence, we end up with that unpaid intern level analysis from GS that's been floating around recently. Because I'm heavily biased to the negative thesis, I give your odds of going into the $40s from here about 60%. But if I were more objective I suppose those odds could go to 75%. However, the full year results will crush any further optimism and the actual reality on the storefronts will pierce into the financials of DMP corporate. They will be faced with an ever growing wave of unprofitable stores. Discounting will exacerbate the problem but raising prices will cede ground to the likes of Pizza Hut.

That operator who runs 12 stores in South Australia was just banned from employing trainees who are paid lower wages. What do you predict will happen to their bottom line in the next 6 months when they are now paying higher wages and doing more discounts?

You mention a 4 to 1 network advantage. Are you sure it is an advantage? We already know that some stores are unfrofitable and that the network average (I think it was the average) is in the low $90k. So we can imagine that there are quite a few stores with profitability in the $40k-60k range? That is only $1k per week away from being unprofitable. A sustained price war (which I believe is extremely likely) would devastate store profits.

But it gets worse. DMP's advantage ends up becoming a disadvantage as they cannibalise the profits of their leading locations to fight the price war. If you owned a highly profitable location with little to no competition how would you feel about being forced to provide steep and sustained discounts that have literally no positive impacts on your bottom line? Not likely to have a positive impact on morale. So now your network numbers work against you as your corporate policies end up negatively affecting multiple more franchisees.

On the other hand, Flynn groups discounts have a much lower aggregate affect because they have a significantly smaller network. This is a nightmare situation for DMP corporate. Every move they make hurts them multiple more times than it hurts Flynn. So I'd be very cautious saying that DMP has an advantage.