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This Pizza Delivery Expert is Going to Outperform

June 16, 2014 | About:
abirk

abirk

3 followers

Ever-longer working hours, shrinking real incomes and the rise of the internet have made couch potatoes of many of us after a day's work – and that has been very good news for the pizza delivery business. Although obesity is accelerating its current pace, pizza is an all-time favorite among people of all ages. Domino's Pizza (DPZ) the pizza delivery expert, is always there for its valued customers to deliver happiness in the form of delicious pizza pies.

Founded in 1960, Domino’s Pizza is an international pizza delivery corporation in the U.S., and operates its business in three segments: domestic stores, domestic supply chain and international. The company has more than 10,000 stores around the globe, and they are as diverse as the communities they serve.

Domino's management knows that the battle in the pizza industry is now being fought digitally. The company is aggressively investing in its online sales platform to drive growth going forward. Analysts also expect the same as the company's earnings are expected to grow at a rate of 15% a year for the next five years, while a dividend yield of 1.40% makes an investment in Domino's even more enticing.

Robust Results

The company repurchased and retired 297,203 shares of its common stock under its open market share repurchase program for approximately $20.2 million, or an average price of $68.11 per share, during the fourth quarter of 2013. During fiscal 2013, the company repurchased and retired 1,666,435 shares of common stock for a total of approximately $97.1 million, or an average price of $58.29 per share. Further, Domino’s repurchased and retired 221,481 shares of its common stock for approximately $15.1 million, or an average of $68.32 per share subsequent to the fourth quarter of 2013 and through Feb. 18, 2014.

Domestic and international same-store sales grew 4.9% and 7.4%, respectively, versus the year-ago quarter . In addition, five new domestic net stores and 97 international net stores fueled top-line growth. Menu innovations and investments in technology are also resonating well with consumers and driving organic growth for Domino's. After its recent agreement with Taste Holdings in South Africa, Domino's growth momentum should also continue as the majority of 150 Taste Holdings outlets will be converted into Domino's units.

Primarily using a franchise-driven business model, Domino's Pizza has delivered consistently good results. The momentum continued in the first quarter of fiscal 2014, leading to global sales increase of 9.1% year-over-year. On the heels of robust top-line growth, earnings surged 15.3% versus the year-ago quarter despite headwinds of currency and higher input costs.

Further, Domino’s had global net store growth of 631 stores in 2013, comprised of 58 net new domestic stores, and a record 573 net new stores internationally.

Domino's is forecasted to report revenue growth of 5.3% in full-year 2014 to $1.89 billion. Earnings per share are expected to increase 15.9% to $2.84 during the year.

Technology-driven growth
Domino's leads the industry with technological innovations. It recently launched an iPad app, which includes the new pizza builder with 3D graphics to take advantage of the iPad's high-definition retina display. It also announced the integration of Google's (GOOGL) payment service -- Google Wallet -- to its Android app. These moves should enhance the customer experience, leading to more orders in the long run due to the ease of use that Domino's is trying to offer.

Another customer-focused innovation profile allows consumers to store their pizza orders and credit card information. During the previous quarter, two million profiles were added, bringing the total to 9 million. This move has clicked with consumers as almost half of the mobile app sales were through established profiles. Overall, digital sales accounted for 45% of total sales in the quarter, up from 40% in the preceding quarter.

Domino's has also launched an Easy Order app using the SYNC AppLink System in collaboration with Ford (F). This is another move which should make ordering easy for customers and ultimately lead to an improvement in orders. Moreover, digital moves such as these are important since other players are also tapping this channel aggressively.

Dominating the Indian Market

India is becoming more and more popular for pizza makers. Most of the revenues come from the Indian market. Indian people like spicier food. Therefore, Domino’s caters pizza as per Indian tastes and preferences. Since 1998, Domino’s has been dominating the Indian market. As of 2012, Pizza Hut had 310 locations, and Papa John's has only 36 locations. As of Oct. 31, 2013, Domino's India had 650 restaurants across 137 cities.

On a Concluding Note

The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, an increase in net income, largely solid financial position with reasonable debt levels by most measures, and good cash flow from operations. Domino’s also has a strong brand, and the number of stores it has opened internationally (and continues to open) shows that it is the leader of the underdeveloped pizza delivery business. These strengths make Domino's Pizza a tasty investment choice.


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Comments

Dr. Paul Price
Dr. Paul Price premium member - 3 months ago

As of Mar. 23, 2014 Domino's had over $1.5 billion in total debt on about 55 million shares. They have a negative book value of almost $23 per share.

Management has borrowed to the hilt to fund share repurchases leaving DPZ with no room for error if the economy, in general, or their business, in particular, slows down.

At today's close of $72.59 the trailing P/E of 28x is almost double DPZ's 10-year median multiple of 15.0x (source: Value Line). Domino's has never before been as expensive as it is currently.

Using shareholder money to buy back shares rather than paying down debt is a horrible choice.

At the presently inflated price, shareholders face extreme risk with little chance for gains.

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