Domino's (DPZ) Banks On Unit Expansion Amid Currency Woes

Domino's Pizza, Inc. (NYSE:DPZ) is riding high on solid brand positioning, international expansion and sales building initiatives. Evidently, shares of the company have gained 25.5% in the past three months against the industry’s 10.3% decline.

However, investors are concerned about its dismal top-line performance, lowered long-term view, fluctuating consumer discretionary spending and currency fluctuations.

Let’s delve deeper.

Factors Driving Growth

The pizza category is a fast-growing segment in the U.S. quick-service restaurant industry and Domino's is one of the largest pizza chains worldwide. In the United States, the company is the market leader in the delivery segment and ranks second in the carry-out division. Notably, the third quarter of 2019 marked the 34th consecutive quarter of positive same-store-sales, domestically. The company has enhanced its brand strength through marketing affiliations with the likes of Coca-Cola (NYSE:KO) and others.

Since Domino’s earns a chunk of its revenues from outside the United States, the company remains committed toward accelerating its presence in high-growth international markets to boost business. The company’s international growth continues to be strong and diversified across markets, courtesy of exceptional unit level economics. Notably, the third quarter of 2019 marked the 103rd consecutive quarter of positive same-store sales in its international business. Globally, Domino’s opened 829 and 1058 net stores in 2017 and 2018, respectively. Also, in the first nine months of 2019, the company opened 574 net new stores.

Furthermore, many international franchisees are steadily generating robust returns. Apart from the established markets such as Canada, Japan, Italy, the U.K., Ireland, Switzerland and South Korea, the emerging markets like Brazil, China, Indonesia and Turkey have been posting solid growth. Australia, Russia, New Zealand and Saudi Arabia are also gaining momentum.

Domino’s continues boosting sales through regular limited time offers (LTO). Moreover, the company is investing heavily in technology-driven initiatives like digital ordering to boost sales. By the end of 2019, the company will launch GPS tracking technology. Meanwhile, it has started driverless pizza delivery services in Houston, TX.

Hurdles

Despite various sales-building initiatives undertaken by the company, its top-line performance has disappointed investors over the past few quarters. Revenues have missed the Zacks Consensus Estimate in five of the trailing six quarters.

Moreover, Domino’s operates in the retail restaurant space that is highly dependent on consumer discretionary spending. Although higher disposable income and increased wages are favoring the industry right now but the company is highly vulnerable to the inconsistent nature of consumer discretionary spending as consumers’ propensity to spend largely depends on the overall macroeconomic scenario.

On the third-quarter earnings conference call, the company announced a new two- to three-year outlook, replacing its prior three- to five-year outlook. This tepid long-term expectation is concerning.

It now expects global retail sales growth of 7-10% in two to three-year period compared with the prior guidance of 8-12% in three to five-year period. It also expects same-store sales growth in the range of 2-5% in two to three-year period compared with earlier guided range of 3-6% in three to five-year period.

Also, the Zacks Rank #3 (Hold) company 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 likely to impact the company’s results. For the current year, the company expects foreign currency impact of $5-$10 million on royalty revenues.

Key Picks

Some better-ranked stocks in the same space include, Chipotle Mexican Grill, Inc. (NYSE:CMG) and Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chipotle and Cracker Barrel have an impressive long-term earnings growth rate of 19.6% and 10%, respectively.

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