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Will Domino’s (DPZ) Continue to Gain Traction in 2018?


Domino's Pizza, Inc. DPZexhibited decent price performance in the year 2017. The company’s inherent potential is evident from its strong brand presence and various initiatives to boost sales.

We note that shares of Domino’s have returned 21.7% in the past one year, slightly outpacing the industry’s growth of 20.8%.

Let’s see what 2018 holds in store for the leading pizza giant.

Strong Sales-Boosting Initiatives to Favor Topline

Domino’s thrives on solid sales building initiatives that aid it in retaining the position as the second largest pizza chain in the world. The company continues to boost sales through regular limited time offers (LTO). Moreover, launch of new products from time to time keeps the menu strong, which favors traffic.

Meanwhile, Domino’s remodeling efforts have gained momentum leading to sales improvement in the past few quarters. The company is on track to convert all of its restaurants to the “Pizza Theater” prototype, which offers a comfy lobby, open-area viewing of the food preparation process and the ability to track carryout orders electronically on a lobby screen. Domino’s remodeling initiative is consequently expected to continue to enhance its potential as a brand and improve guest experience through 2018.

Moreover, to cater to customer’s need of digital ordering, Domino’s is persistently adding to its digital capabilities with the launch of various ordering apps and platforms. Furthermore, the company’s world-class digital ordering platforms which include the likes of Alphabet Inc.’s GOOGL Google Home, Facebook FB Messenger, and Apple AAPL Watch have kept it at the forefront of digital ordering and customer convenience. Moreover, the trend is expected to continue in 2018. Notably, customers can order via a Pizza emoji on text, which is a huge positive considering the technology centric customers.

Additionally, per the company’s recent anywhere-ordering-platform innovation, customers can now place a new order for a custom-built pizza or any other item from the menu without the need of a Pizza Profile or saved Easy Order. This marks the next major step in the evolution of the company’s ever-growing suite of exclusive and revolutionary ordering platforms.

Going forward, Domino’s is committed toward continuing with investments and maintaining its lead in the digital arena which should further boost sales and enhance competitive positioning.

Subsequently, we note that Domino’s estimated revenues for 2018 are pegged at $3.11 billion, reflecting 10.4% year-over-year increase.

Re-Franchising Strategy Shields Earnings

Domino’s has a wide franchise network, both domestically and internationally. Reducing ownership of restaurants and focusing more on re-franchising minimizes the company’s capital requirements and facilitates earnings per share growth. Although re-franchising weighs on near-term revenues, it replaces company-operated sales with franchised sales in the long term. This is likely to reduce the company’s capital requirements and drive earnings.

Arguably, earnings growth is of utmost importance for determining a stock’s potential as surging profit levels often indicate solid prospects (and stock price gains). In 2018, Domino’s earnings per share are expected to grow 23.5%, higher than the industry’s projected growth of 10%.

Franchising Model Aids Margins & Returns

Domino’s is less affected by food inflation as a result of franchising. Despite costs incurred from the sales building efforts, the company’s trailing 12-month net margin is 9.5% as compared with the industry’s tally of 3.3%.

Moreover, owing to refranchising, free cash flow continues to grow, consequently allowing reinvestment for increasing brand recognition and shareholder return. Meanwhile, the company’s recapitalization deal also makes cash available for potential special dividend and share repurchases, depending upon the board’s approval.

Upward Estimate Revisions for 2018

Analysts have increased their estimates for the company for 2018, which makes the earnings picture favorable. In the past 60 days, three estimates have moved north compared with no downward revision for the next year. This trend has caused the consensus estimate to trend higher, going from $6.96 a share 60 days ago to its current level of $7.14.

International Expansion to Continue Aiding Growth

Since Domino’s earns a chunk of revenues from outside the United States, it remains committed to expansion in high-growth international markets to boost business. Notably, the company’s international growth continues to be strong and diversified across markets, driven by exceptional unit level economics. The third quarter of 2017 marked the 95th consecutive quarter of positive same-store sales in international business. Notably, the company opened 964 net new stores in international markets in the trailing four quarters and has 8,943 stores outside the United States as of Sep 10, 2017.

Meanwhile, India remains a market of immense growth potential. In fact, Domino’s India operations are the fastest growing operations in its global system. Moreover, the company’s entry into Slovakia and Malta this year is proof of its ever-expanding base.

Zacks Rank & VGM Score

Domino’s carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, per our VGM Score, which identifies the most attractive value, growth and momentum characteristics, Domino’s has Growth Score of A reflecting the stock’s high growth potential. A Momentum Score of B makes the stock a lucrative pick in the present.

In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 make solid investment choices.

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