A Look at Domino's Pizza

On Tuesday, February 28, Domino's Pizza DPZ reported its fourth quarter 2011 earnings. With a surprise in profits marking the pizza giant's18th year of consecutive quarterly growth in same-store sales, the company's stock price surged more than 10% on the day. However, the question remains: how long can the momentum last?

Financial Metrics

Compared to the industry average, Domino's operating margin, EPS, and P/S is quite high, while its P/E and PEG is mildly higher than normal. Meanwhile, the company's quarterly revenue growth and gross margin is below the industry average, demonstrating that company still has room for improvement.

Innovation Matters

Thanks to new additions to its product line such as artisan pizzas, stuffed cheesy bread and parmesan bread bites, coupled with substantial changes to the crust and sauce of its pizzas, Domino's has gained market share in the US over the past couple years.

Domino's CEO Patrick Doyle said in a conference call that it's recent growth can be attributed to more than just its new products.

"The more important story continues to be a higher level of retention and customer satisfaction and frequency from customers, which is really creating that new base of business that we've been talking about," Doyle said. "We're not the same company we were even two years ago."

Domino's continued focus on mobile and internet orders should also help drive growth.

Expansion May Accelerate

"International is a very big part of the equation," Doyle said during the call. "Domino's Pizza benefits from scale, but also with a long-run rate for growth."

He went on to note that Domino's only has 11% estimated market share internationally in "off-premise" pizza, and that the company's domestic store growth failed to meet its own expectations last year.

Judging by Doyle's statements, it seems Domino's will look to expand in 2012.

Though the costs associated with opening new stores could eat into Domino's revenue next year, in the long run, higher market share - especially in the international market - would likely do wonders for the company.

At the same time, it must be kept in mind that Domino's ability to grow will be in many ways determined by the company's ability to manage costs.

Cost Management

On the topic of cost management, Doyle said in his conference call that Domino's "experienced spikes in commodity prices in 2011, which eroded store margins during the summer and made franchisees more hesitant to expand."

As a restaurant chain, Domino's is vulnerable to fluctuations in commodity prices. Consequently, the company's CPI and PPI levels should be strongly considered when evaluating Domino's future.

Broker Outlook for Domino's

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