On Sep 4, 2014, we issued an updated research report on Domino's Pizza, Inc. (DPZ).
On Jul 22, this pizza delivery company reported solid second-quarter results with earnings and revenues beating the Zacks Consensus Estimate. Adjusted earnings of 67 cents per share grew 21.9% year over year driven by higher revenues and lower share count.
Quarterly revenues increased almost 9% year over year, thanks to strong domestic as well as international sales and higher supply-chain revenues. During the quarter, Domino's Pizza’s domestic stores comps were up 5.4%, while international store comps recorded 7.7% growth.
Domino’s Pizza has been posting impressive results for the past few quarters on the back of higher traffic and unit growth. Also, the company was successful in expanding its operating margin during the quarter on the back of favorable revenue mix and higher franchise royalties.
Moreover, Domino’s Pizza’s international operations promise significant growth potential. The company has witnessed 82 consecutive quarters of positive same-store sales in its international business. Apart from established markets such as Canada, Japan, the U.K. and South Korea, emerging markets like Brazil and Indonesia have been posting strong growth. The company expects unit growth within 4% to 6% over the long term, of which the majority is expected in the international markets.
Domino’s Pizza has undertaken several brand revitalization initiatives such as product and technological innovation, increasing store count and re-imaging existing stores to drive revenues. We believe these initiatives will contribute significantly to the company’s growth in the near future.
Driven by these initiatives, the company expects global retails sales growth in the range of 6% to 10% over the long term. We expect the company’s digital ordering system and foray into the Pan Pizza and boneless chicken category to help it sustain the top-line momentum.
However, like other fast food chains, Domino’s is experiencing weak consumer spending environment owing to macroeconomic pressures. U.S. consumers are burdened with higher gasoline prices, payroll tax increases and delayed tax refund checks. These external forces might restrict consumer discretionary spending further, which, in turn, might put pressure on the company’s sales. Also, rising cost pressure due to food cost inflation and expenses related to re-imaging and unit expansion initiatives is a major headwind for this Zacks Rank #2 (Buy) company.
Other Stocks to Consider
Better-ranked stocks worth considering in the restaurant industry include BJ's Restaurants, Inc. (BJRI), Chipotle Mexican Grill, Inc. (CMG) and Jamba, Inc. (JMBA). All these stocks sport a Zacks Rank #1 (Strong Buy).
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