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Domino’s Pizza (NYSE: DPZ) shares have struggled over the last three months and took a pounding following what the market perceived as weak earnings report on Oct. 8. But were earnings really all that bad?
The pizza delivery company missed earnings expectations, but its comparable-store sales growth was impressive.
Domino’s domestic same-store sales growth was 10.5% in the third quarter, well above the 7.7% gain in third quarter of 2014.
And international comp-store sales growth was 7.7%, versus 7.1% in the same quarter last year. Domino’s has now posted positive international comparable-store sales growth for 21 straight years.
Strong Tailwinds
The pizza delivery market is fruitful and tends to do well regardless of the economic environment, given the relative value of pizza versus other foods.
Domino’s is already the market leader when it comes to pizza delivery in the U.S., and it renewed its focus on marketing over the last few years. Now Domino’s has a big opportunity to increase expansion overseas, where pizza markets are underdeveloped. This move won’t require a lot of capital either, as Domino’s plans to leverage its franchise model.
Domino’s big pizza stock competitor is Papa John’s International (NASDAQ: PZZA), which has created a competitive advantage over other restaurants with higher-quality ingredients. However Domino’s is moving in on Papa John’s with a its own higher-quality ingredients and lunchtime ideas like oven-baked sandwiches, which is driving more traffic to the stores.
In valuation, Domino’s shares trade at 26 times next year’s earnings estimates. That’s right in line with Papa John’s, but the two are very different. Domino’s has profit margins that are twice that of Papa John’s. Let’s not forget the 1.2% dividend yield that Domino’s pays.
Innovation Is Key
Domino’s has been taking over the world in terms of order ease and delivery, having rolled out the order anywhere initiative earlier this year, which is focused on making it easier to order. Customers can order via text, a smartwatch or use Twitter (NYSE: TWTR).
Digital orders now account for half of Domino’s U.S. revenues and 40% of international. The beauty here is that digital orders are more accurate, have lower labor costs and are more accurate.
With that, Domino’s story has become more about technology than just pizza. It’s proving to be an innovator. This includes its push into international markets where it’s catering to certain regions, such as banana pizza in Brazil, squid topping in Japan and spicy cheese in India.
A Special Dividend?
Domino’s is raising a lot of debt, some $1.5 billion. It’s something it did back in 2012 right before paying a special dividend. The debt raise is expected to be done in the fourth quarter and will raise its debt-to-EBITDA leverage ratio from 3.6 times to 5.8 times.
Now, after its last recapitalization back in early 2012 Domino’s paid a $3 a share special dividend that was about 10% of its market capitalization. Since paying that $3 dividend, shares are up threefold. Will it issue another special dividend? After the recent re-leveraging, which includes refinancing some existing debt, Domino’s will be left with $900 million. That’s roughly $16 a share, which is just over 15% of its market cap.
Like other restaurants, Domino’s has little pricing power, but it’s a great stock that can benefit from the steady demand for pizza. There’s also the opportunity to see higher shareholder returns in the near future via buybacks and dividends.
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