Balanced View on Domino's Pizza - Analyst Blog

On Apr 10, 2014, we issued an updated research report on Domino's Pizza, Inc. DPZ.

On Feb 25, this pizza delivery company reported solid fourth quarter results with earnings and revenue beating the Zacks Consensus Estimate. Adjusted earnings of 78 cents per share for the fourth quarter grew 21.9% year over year driven by higher revenues, margin expansion and lower share count.

Quarterly revenues increased 5% year over year, thanks to strong international sales and higher supply-chain revenues. During the quarter, Domino's Pizza's domestic stores comps were up 3.7% while international store comps recorded 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 owing to favorable revenue mix and higher franchise royalties. Estimates for both 2014 and 2015 have largely moved upwards over the last 60 days driven by the strong quarterly performance.

Domino's Pizza's international operations promise significant growth potential. The company has witnessed 80 consecutive quarters of positive same-store sales in its international business. Apart from established markets such as Canada, the UK and South Korea, emerging markets like Brazil and Indonesia have been posting strong growth. The company expects unit growth to be 4.0% to 6.0% over the long term, of which the majority is expected to be in the international markets.

Dominos Pizza has undertaken several brand revitalization initiatives such as product and technological innovation, increasing store count and re-imaging existing stores to drive its revenues. We believe these initiatives will contribute significantly to Domino's growth in the near future. Driven by these initiatives, the company expects global retails sales growth in the range of 6.0% to 10.0% over the long-term. We expect the company's digital ordering system and its foray into the Pan Pizza category to help it sustain top line momentum.

However, like other fast food chains, the company 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 can put pressure on the company's sales. Also, rising cost pressure due to reimaging and unit expansion initiatives is a major headwind for this Zacks Rank #3 (Hold) company.

Other Stocks to Consider

Some better-ranked stocks worth considering in the restaurant industry include Ignite Restaurant Group, Inc. IRG, The Wendy's Company WEN, Famous Dave's of America Inc. DAVE. All these stocks sport a Zacks Rank #1 (Strong Buy).