Here's Why Investors May Find Domino's (DPZ) Appetizing Now
Zacks Investment Research | Jun 06, 2018 03:52AM ET
Domino's Pizza, Inc. (NYSE:DPZ) is currently one of the world's largest fast-food chains, with more than 14,800 stores in over 85 international markets. The company’s operational advantages, given its market share and scale, along with consistent focus on innovation, execution of growth strategy and digital initiatives should help the stock maintain its solid performance in the quarters ahead. Therefore, if you haven’t taken advantage of the share price appreciation yet, it’s time you add this stock to your portfolio.
In a year’s time, Domino’s shares have gained 20.4%, outperforming the industry ’s decline of 0.8%. Also, the company’s earnings have surpassed the Zacks Consensus Estimate in seven out of the trailing eight quarters. Additionally, Domino’s 2018 earnings estimates have moved up 0.2% over the past 30 days. This testifies the unwavering confidence of analysts in the company’s future earnings potential. The company’s revenues have also topped the consensus mark in seven out of the preceding eight quarters.
Domino’s currently has a Zacks Rank #2 (Buy) and a growth score of A. Back-tested results show that stocks with Growth Scores of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 handily outperform others. You can see the complete list of today’s Zacks #1 Rank stocks here .
Sales-Building Efforts to Drive Revenues
Domino’s continues boosting sales through regular limited-time offers (LTO). Over the past few quarters, Domino’s remodeling efforts have gained momentum, leading to sales improvement. The company is on track to convert all its restaurants to the “Pizza Theater” prototype that offers a comfy lobby, open-area viewing of the food preparation process and the ability to track carryout orders electronically on a lobby screen. Domino’s remodeling initiative is thus expected to continue enhancing its potential as a brand and augment guest experience.
In order to drive traffic and in turn revenues, this pizza giant has been ramping up investments in technology-driven initiatives like digital ordering. In 2017, the company's AnyWare suite of ordering platforms that allows customers to order through apps such as Google (NASDAQ:GOOGL) Home, Facebook (NASDAQ:FB) Messenger, Amazon (NASDAQ:AMZN) Echo and Twitter (NYSE:TWTR) , and also via a Pizza emoji on text, grew significantly.
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The company is also committed toward maintaining investments and its lead in the digital arena, which should boost sales apart from enhancing its competitive position. In fact, Domino’s is expected to become the leading pizza company on digital advancement, overtaking Pizza Hut that operates under Yum! Brands (NYSE:YUM) .
Moreover, the company reaffirmed its three-to-five-year outlook, which hints at global retail sales improvement between 8% and 12%, and domestic and international comps growth of 3% and 6%, respectively. Subsequently, the consensus estimate for 2018 sales is pegged at $3.5 billion, suggesting 24.5% year-over-year growth.
Franchising Strategy Safeguards Earnings
Domino’s has a wide franchise network, both domestically and internationally. Reducing its ownership of restaurants and focusing more on refranchising minimize the company’s capital requirements, and facilitate earnings per share growth. In addition, free cash flow continues to grow, thus allowing reinvestment for increasing its brand recognition and shareholders’ return.
Moreover, Domino’s is less affected by food inflation as a result of franchising compared to other pizza companies with global operations. Meanwhile, the company’s recapitalization deal also makes cash available for potential special dividend and share repurchases, depending upon the board’s approval.
For 2018, the consensus estimate for Domino's earnings shows an impressive year-over-year growth of 53.8%. The company’s earnings are also expected to grow at an annualized rate of 19.1% over the next three-to-five years.
Solid International Expansion
Since Domino’s earns a chunk of its revenues from outside the United States, the company remains committed to accelerate its presence in the high-growth international markets to boost business. Meanwhile, the company’s international growth continues to be strong and diversified across markets, driven by exceptional unit-level economics.
Notably, the first quarter of 2018 marked the 97th consecutive quarter of positive same-store sales in its international business. It’s all four geographic regions reported positive comps, with Americas and Asia-Pacific gaining the most. Domino’s opened 829 net new stores in the international markets in 2017 and 79 in first-quarter 2018.
Favorable Industry Scenario
The U.S. quick-service pizza space is growing by leaps and bounds. Overshadowing independent restaurants, the pizza bigwigs are continuously strategizing to attract more customers. Per The Statistics Portal report, the United States sees approximately $33 billion of consumer spending in the quick-service pizza category every year. Out of the total, roughly $15 billion constitutes take-out pizza services, followed by pizza delivery of around $10 billion.
Per unit sales for chain pizzerias are nearly 70% higher than that of the independent restaurants. According to Euromonitor, pizza chains grew 5.8% in 2017, while independent restaurants recorded a 2.7% sales rise. The PMQ Pizza Magazine estimates a total of $45.1 billion sales in 2018, out of which $26.6 billion will come from the top 50 chains in the country. Independent restaurants are likely to rake in around $18.5 billion.
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