Domino's Pizza Stock Up 15% in 6 Months, Can it Gain Further?

Domino's Pizza, Inc. DPZ is riding high on robust international growth, consistent focus on innovation, execution of growth strategy and digital initiatives. Consequently, the stock has rallied 15.2% in the past six months, outperforming the industry’s gain of 2.7%. Nevertheless, the company still has some concerns to address.

Let’s delve deeper to find out the factors likely to have a bearing on the company’s performance.

Digital Initiatives to Boost Revenues

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, which allow customers to order via various ordering apps and platforms such as — Google Home, Facebook Messenger, Apple Watch, Amazon Echo, Twitter and a Pizza emoji on text — increased significantly. Meanwhile, Domino’s digital loyalty program — Piece of the Pie Rewards — will continue contributing significantly to traffic gains. The extended ways to order a pizza has thus kept Domino’s in the forefront of digital ordering and customer convenience.

In late 2015, the company 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, in conjunction with Ford Motor Co., has initiated a research on consumers’ responses to Pizza delivery using self-driving vehicles.

Also, Domino’s continues to boost sales through regular limited time offers (LTO). In June 2017, the company launched a new product — bread twists — which is expected to favorably impact its performance. Moreover, over the past few quarters, Domino’s remodeling efforts have gained momentum leading to sales improvement. Currently, the company is on track to convert all of its restaurants to the “Pizza Theater” prototype that offers a comfy lobby, open-area viewing of the food preparation process and the ability to track carryout orders electronically on a lobby screen.

Franchising Strategy Bode Well

Domino’s has a wide franchise network, both domestically and internationally. By reducing its ownership of restaurants and focusing more on re-franchising, the company intends to minimize capital requirements and facilitate earnings per share growth as well as ROE expansion. Meanwhile, free cash flow continues to grow, thus 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.

Hurdles to Cross

The Zacks Rank #3 (Hold) company has undertaken a number of sales building efforts (like re-imaging of restaurants, implementation of technology). Performance-based incentives and compensation along with higher advertising expenses are also resulting in higher costs. Additionally, the collapse of the Republican-led bill, which was intended to replace Obamacare, means that the Affordable Care Act is here to stay. Thus, the restaurant operators will have to continue shouldering increased labor costs, which in turn might hurt margins.

Furthermore, Domino’s has considerable international presence and is therefore highly vulnerable to fluctuations in exchange rates. Strengthening of the dollar against certain currencies, including the British pound, is also likely to impact the company’s results. In 2017, foreign currency had a less than $1 million negative impact on royalty revenues.

Key Picks

Better-ranked stocks from the same space are Arcos Dorados Holdings Inc. ARCO, Dine Brands Global, Inc. DIN and Ruth's Hospitality Group, Inc. RUTH. All these stocks carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Arcos Dorados Holdings has an impressive long-term earnings growth rate of 19.4%.

Dine Brands Global has reported better-than-expected earnings in the preceding four quarters, with an average beat of 7.3%.

Ruth's Hospitality Group has an impressive long-term earnings growth rate of 14.3%.

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