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Domino’s Pizza Rides on Digital Initiatives and Franchising

Zacks

Domino's Pizza, Inc. DPZ is a leading pizza restaurant chain in the world. Although the company’s roots are in convenient pizza delivery, a significant amount of sales also come from carryout customers.

In fourth-quarter 2017, the company’s adjusted earnings came in at $1.94 per share and increased 31.1% year over year. The improvement was backed by higher net income and lower diluted share count as a result of share repurchases.

Quarterly revenues of $891.5 million were up 8.8% year over year. The increase was driven by higher supply chain revenues as well as higher royalties from retail sales and positive currency impacts.

Domino's Pizza Inc Revenue (TTM)


Notably, this marked the 27th consecutive quarter of positive U.S. comparable sales and the 96th consecutive quarter of positive international comps. Meanwhile, Domino’s continues to increase store count at a decent pace and opened more than 400 net new stores in the quarter.

We observe that Domino’s shares have returned 21.9% in the past year, outperforming the 15.1% rally of the industry it belongs to.

Franchising Strategy Facilitates Earnings Per Share Growth

Domino’s has a wide franchise network, both domestically and internationally. Notably, by reducing its ownership of restaurants and focusing more on re-franchising, the company minimizes capital requirements and facilitates earnings per share growth and ROE expansion.

In addition, free cash flow continues to grow thereby allowing reinvestment for increasing brand recognition and shareholder return. In fact, the company has increased its dividend by 25%, 24%, 23%, 21% and 20% in 2014, 2015, 2016, 2017 and 2018, respectively, after initiating regular dividends in 2013.

Moreover, Domino’s is less affected by food inflation as a result of franchising compared with other pizza companies with global operations. Meanwhile, the company’s recapitalization deal also makes cash available for potential special dividend and share repurchases, depending upon the board’s approval.

Digital Ordering Boosts Sales

Domino’s is investing heavily in technology-driven initiatives like digital ordering to boost sales. In 2017, the company’s AnyWare suite of ordering platforms that allow customers to order from various ordering apps and platforms such as — Google Home, Facebook Messenger, Apple Watch, Amazon Echo, Twitter and via a Pizza emoji on text — grew significantly. Also, its digital loyalty program — Piece of the Pie Rewards — continues to contribute significantly to traffic gains.

In late 2015, Domino's had announced the design and launch of DXP (Delivery Expert), a purpose-built pizza delivery vehicle, and extended it to more markets in May 2016. Taking a step further, Domino's and Ford Motor Co. also initiated a research on consumers’ responses to Pizza delivery using self-driving vehicles. As a part of the initiative, researchers from both the companies will be analyzing customer reactions from their interactions with a self-driving vehicle delivering their food. This research would help the companies understand consumers’ perspective on technologically advanced methods of food delivery.

Notably, digital leadership is helping the company expand its brand in the domestic market as well as overseas. In 2017, Domino’s invested $90.3 million in its proprietary point-of-sale system — Domino’s PULSE, digital ordering platform, supply chain centers, new Company-owned stores, reimaging existing Company-owned stores internal enterprise systems and other technology initiatives.

To Conclude

The extended ways to order a pizza has kept Domino’s in the forefront of digital ordering and customer convenience. In fact, thecompany is committed toward continuing with its investments and maintaining its lead in the digital arena, which should further boost sales and enhance its competitive positioning.

Zacks Rank and Key Picks

Domino's carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Darden Restaurants DRI, BJ's Restaurants, Inc. BJRI and Papa Murphy's Holdings FRSH, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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