Domino's Pizza Inc. (DPZ), the second largest pizza company in the world and the market leader in the U.S. pizza delivery market, was up an astonishing 28% in 2012. So far, the returns have continued into 2013 with shares up about 6.50% since the start of the year. Over the last couple of years the company has successfully reshaped its image and brand identity. I believe the company's success will continue although I wouldn't advise chasing stocks after they have made incredible moves to the upside as it is a very risky trade. In this short article, I will outline why I will be buying the stock if we see a pullback.
The company currently has over 5,000 franchised stores internationally. Since 2008, the company has seen 30% international store growth, which is greater than the growth seen by Dunkin' Donuts (DNKN), Starbucks (SBUX), Yum! Brands (YUM), and McDonald's (MCD). The company was very positive on its potential international expansion in its January 2013 Investor Presentation. This company believes it has the potential to add almost 3,000 additional stores in its top 10 international markets.
Over the last couple of years the company has seen international same-store sales growth at almost 7%. I don't see Domino's international growth slowing anytime soon with so much potential still left in India, Turkey, and Asia.
In the United States, the company currently holds an 11% market share of the quick serve pizza restaurant market and a 22% market share of the pizza delivery market. The company has over 4,500 franchised stores. Same-stores sales growth last quarter was 3.3% and I believe this number will increase as Domino's image continue to improve. The company has worked very hard in reshaping the view of the brand and is just in the early stages of reaping its rewards.
Domino's has adjusted well to the expansion of the digital world. Last quarter, the company saw 40% of all domestic delivery orders placed through digital channels. Customers have downloaded its mobile ordering applications almost 3.5 million times. With so many downloads, the company has positioned itself well to capture repeat customer business. Personally, I have downloaded the Domino's application on my smartphone and since have found myself ordering more frequently due to the simplicity and convenience.
Rising commodity costs remain a large risk for the company. Domino's claims it can pass through the increases in the price of commodity inputs on most items. Although, if prices rise substantially, the company would have to make the decision to raise prices substantially or have its operating profit margin suffer. About 40% of the cost of a Domino's pizza is cheese. The company uses about 200 million pounds of cheese for its pizza each year. The number is actually much higher when you account for all the cheese used in the array of other items on the menu. Below is the breakdown of commodity inputs as reported by the company:
The company has used pricing agreements to lower exposure to volatility in cheese prices. Quick service restaurant companies can attempt to protect themselves and consumers from rising inputs prices but a perfect hedge will never exist.
The general market has experienced very high returns over the last couple of months. A market pullback would be reasonable and healthy. Domino's is on my personal shopping list if I see shares pullback about 10% I will pull the trigger and start a position in the company. I would step slowly into a full position over a period of time because shares are up so much already.
The statistics used in this article were sourced from the January 2013 Investor Presentation PDF. You can download the PDF from the company's website here.
Additional disclosure: You should not treat any opinion expressed in this article as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of an opinion.