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These 2 Pizza Chains Look Like Good Investments

June 17, 2014 | About:
jaggom

jaggom

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Domino’s Pizza (DPZ) has the ability to grow despite headwinds. It never blamed economic weakness and tepid consumer spending for its poor performance. According to Blackbox Intelligence, the environment for the restaurant industry in 2013 had been gloomy.

It’s easy to differentiate the winners from the whiners. Domino’s Pizza and Papa John’s (PZZA) released their recent results which were far better than Yum! Brands (YUM). Domino’s sustained the momentum of the first three quarters and came up with good fourth-quarter results. Let’s have a look if it can maintain its winning streak going forward.

Solid growth

Both the company and franchisee-owned outlets drive Domino’s operation. During the fourth quarter, the domestic and international comparable-store sales grew 3.7% and 7%, respectively. Further, it had net 47 domestic and 273 international stores during the quarter. The system-wide sales were driven higher by these new stores and positive comps, resulting in year over year 5% revenue growth to $566.5 million.

Earnings increased 21.9% year-over-year to $0.76 per share on the account of positive comps, top line growth, lower share count, and margin expansion. The company results beat the estimates and were received well by the market.

Strategies for the future

Looking ahead, Domino’s is expected to sustain the growth momentum. The growths for domestic and international comps are expected to be in the range of 2%-4% and 3%-6%, respectively. New store openings are also expected to be in the range of 4%-6%. The successful joint marketing initiative which is a multi-year tie up of Domino’s with Coca-Cola will help Domino's bolster its volumes.

Further, going forward Domino’s digital ordering is one of its catalysts. Digital ordering is is gaining momentum and growing at about 5% a year and currently, it contributes 40% to revenue. Domino’s in association with Ford, unveiled the Easy Order app using SYNC AppLink System. This is believed to be available for customers from mid-2014, and will prove to be one of the growth drivers going forward as it will enable customers to order Domino’s from their cars.

Competitors' moves

In case of Domino’s the digital platform contributes 40% of revenue is, while for Papa John’s which is the first national pizza company it contributes to more than 45% of domestic system sales in 2013. This will very soon make it the first national pizza chain to achieve domestic system-wide digital sales mix of 50%. This is obvious as Papa John's was the first national pizza company to offer system-wide online ordering in 2001.

Papa John’s had an excellent fourth quarter and it outperformed its peers and the market during past one year by a substantial amount. The North American and international comps growth for Papa John were 9% and 7%, respectively year over year. This pumped up the revenue growth of 12.2% year-over-year. EPS increased astonishingly 32% year-over-year to $0.41.

Despite the weakness in restaurant industry Domino’s and Papa John’s have grown their top lines during the last year. However, Yum! is facing troubled times, with its revenue declining. The management describes 2013 as a very humbling year. It has been facing challenging times in China and is coping up to deal with one problem after another. Still, the company expects to bounce back in 2014.

A recent violation of the health code in China by an employee at Yum! Brands’ Pizza Hut chain might further hit the company’s image. The long term effects of this are difficult to predict, but it’s not going to help in growth in any form for sure.

Conclusion

For the past few years, Domino’s Pizza and Papa John’s have grown impressively. Both companies have successfully tapped the e-commerce trend as illustrated by their digital orders. Domino’s tie-up with key consumer goods players such as Coca-Cola, and Papa John’s robust online ordering mechanism should help drive growth for these companies going forward, and the troubles of Pizza Hut could be another growth driver for both.


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