On Nov 28, 2014, we issued an updated research report on Domino's Pizza, Inc. (DPZ).
Domino's Pizza posted strong third-quarter 2014 results on Oct 14 with both earnings and revenues beating the Zacks Consensus Estimate. Earnings of 63 cents per share rose 23.5% year over year. The upside was driven by strong revenues and lower share count.
Quarterly revenues increased 10.5% year over year to $446.6 million. Revenues were driven by strong comps — both in domestic and international markets. Increased supply chain revenues due to higher commodity prices and volumes also boosted the top line.
Since Domino’s earns a chunk of its revenues from outside the U.S., it remains committed to accelerate its presence in high-growth international markets to boost its business. Over the past four years, the company has opened 1,800 stores in 10 countries. Currently, Domino’s has witnessed 83 consecutive quarters of positive same-store sales in its international business.
Domino’s Pizza has undertaken several brand revitalization initiatives such as menu innovation, store expansion and re-imaging existing stores to significantly drive revenues. We believe the company’s foray into the Pan Pizza and Specialty Chicken categories and other sales initiatives would help it to sustain the top-line momentum.
Another initiative taken up by the company to boost sales is the mandatory re-imaging of stores, which has received an overwhelming response from franchisees. The company has completed re-imaging almost 10% of its U.S. stores and just over 20% of international stores. Given the response of customers at the re-imaged stores, Domino’s intends to continue remodeling at company-owned and franchised stores.
The digital wave has hit the U.S. fast casual restaurant sector as more and more restaurants are deploying technology to enhance guest experience. Domino’s is also investing heavily in technology-driven initiatives like digital ordering to boost sales.
However, like other food chains. Domino’s margins have suffered due to higher commodity costs. Costs of cheese, pork and other meats have risen sharply in the recent past. Prices of food commodities are expected to continue under pressure due to worldwide agricultural supply and demand imbalance and other macroeconomic factors. These rising costs are expected to continue to hurt margins further.
As a retail restaurant, Dominos is dependent on the consumer discretionary spending environment. The restaurant industry has been experiencing low consumption over the last few quarters. Despite moderate improvement in economic growth, consumers are increasing their spending only modestly as an increase in jobs this year is yet to translate into significantly higher wages. High interest rates, higher health care costs and still-tightened credit availability continue to hurt consumer discretionary spending in the U.S.
Other Stocks to Consider
Domino's Pizza presently has a Zacks Rank #2 (Buy). Other stocks that can be considered in the restaurant industry include BJ's Restaurants, Inc. (BJRI), DineEquity, Inc. (DIN) and Ruby Tuesday, Inc. (RT). All these stocks sport a Zacks Rank #1 (Strong Buy).
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