Recognized world leader Pizza Company Domino’s Pizza Inc. (DPZ, Financial) sells and delivers pizza through the U.S. and internationally, operating its business in three segments: Domestic Stores, Domestic Supply Chain and International. As of Dec. 31, 2013, the domestic stores comprised 4,596 franchised stores and 390 company-owned stores. The International segment consists of 5,900 franchised stores outside the U.S. Generating nearly $3.8 billion in the U.S. and $4.2 billion internationally during 2013, Domino’s fourth-quarter 2013 results beat estimated figures for both earnings and revenues. Same-store sales popped 3.7% domestically and 7% internationally, while diluted earnings per share leaped 21.9% to $0.78. It was the 80th quarter and 20th full year in a row of international same-store sales growth for Domino's.
The franchise owner-operators system and the increased emphasis on technology innovation have pushed revenues 5% year over year. Moreover, the digital ordering system installed by the company, with ordering apps for iPhone, Android, Windows Phone 8 and Kindle Fire generated approximately 40% of sales in the U.S. International segment has been showing promising results, with significant growth potential: Management expects international same store sales growth of 3 6%. Still, this industry is always subjected to macroeconomic pressures and cyclicality, putting these companies in certain risk of being affected by these setbacks.
Good Company, Great Improvements
Domino’s is currently the second largest pizza chain in the U.S., and leader in the delivery segment, with a strong brand position. Its franchising strategy minimizes the company’s capital requirements and facilitates EPS growth and ROE expansion. Shareholders have been consistently rewarded by Domino’s through share repurchases and dividend distribution – recently increased 25.0% for 2014-, and is likely to continued, given the fact that the board of directors has already approved an additional $200.0 million share repurchase authorization for 2014.
A recent brand revitalization initiative is on track, with product and technology innovations designed to increase store count and raise guest traffic. The company introduced new products as to diversify its menu, with side items such as Parmesan Bread Bites, Stuffed Cheesy Bread and Chocolate Lava Crunch Cakes, as well as the new Handmade Pan Pizzas, and Oven Baked Sandwiches. Besides, the company established a new distribution network, the Domino’s Supply Chain Services (SCS), through which it supplies dough and other raw materials to more than 5,000 stores in the U.S.
Domino’s re-imaging of stores strategy, which includes relocation, began in November 2013, and is expected to be finished by the end of 2017. Moreover, the company is improving its online ordering platform, released in 2006. Investing heavily on this technology-driven initiative in digital ordering, the company has launched new mobile applications for diverse mobile devices, and a new Spanish-language ordering app for smartphones, being therefore capable to cover over 95% of smartphones sold in the U.S. These developments are expected to boost sales while enabling customers to save time and effort by using the enhanced app system. Domino’s, currently generating over $3 billion in digital sales globally in 2013, has become one of the top technology-driven brands across the globe. Digital Ordering is a key competitive advantage and is allowing Domino's Pizza Inc. (DPZ, Financial) to compete strongly; CEO J. Patrick Doyle said, "We're effectively competing against smaller players that either don't have digital ordering or certainly don't have the same kind of robust platform that we're operating on."
Expansion Plans
An international expansion is taking place for Domino’s and since the majority of its revenue is being generated by international market, the firm has committed to accelerate its presence within these markets outside the U.S. With 80 consecutive quarters of positive same-store sales in its global units, between 70 countries, Domino’s is looking towards emerging markets such as Brazil and Indonesia. The Indian market has been growing rapidly and is set to replace UK as the largest international market for Domino's. With 95% of the world's population living outside the U.S., CEO Doyle believes this is the right strategy to seize the global market’s growth opportunities.
In this effort towards developing its worldwide footprint, Domino’s has signed a 15-year license agreement with Johannesburg-based Taste Holdings as part of the company’s brand in South Africa, Lesotho, Swaziland, Namibia, Botswana, Zimbabwe and Mozambique. Through this agreement, franchise stores of Taste Holdings will be converted to Domino’s Pizza outlets.
Bottom Line
Indeed this industry has always been regarded as an unstable one, given the various pressures it suffers and difficulties to sustain profitability and growth levels. The weak consumer spending environment has affected the companies in the restaurant industry, as consumers burdened with higher gasoline prices payroll tax increases and delayed tax refund checks have been restricting its discretionary spending. And the fact that Domino’s has been investing heavily for some time in reimaging and unit expansions as well as technological improvements, has raised some questions regarding the future benefits of these initiatives.
Still, Domino’s Pizza is a company that has survived two recessions, and managed to grow during and after them, reporting steady figures. The efforts in product enhancement and technological development conducted by the company are expected to increase sales, with an estimated unit growth of 4.0% to 6.0% over the long term, mainly in the international markets. CEO J. Patrick Doyle believes "technology" is the main driver of growth results; "Consumers worldwide are redefining convenience, and we are meeting their evolving needs by pioneering technology in the restaurant industry." Doyle said. Domino’s is everyday regarded as a more promising company, and a long-term steady grower stock, with low business risk.
Disclosure: Damian Illia holds no position in any of the stocks mentioned.
