Domino's Pizza May Soon Overtake Pizza Hut

| About: Domino's Pizza, (DPZ)

Pizza Hut, as represented by YUM! Brands (YUM), may be the industry leader today but Domino's Pizza (DPZ) is poised to grab the market leadership from YUM! Brands in the near future. At present, Domino's Pizza's international store-count is growing almost twice as fast as Yum! Brands, and its same store sales grew quarter-over-quarter for the past 78 consecutive quarters.

In fact, Domino's Pizza today is already recognized as the world leader in pizza delivery. This is driven, in part, by its industry-leading and state-of-the-art digital ordering system that brought in a total of $2 billion in global sales in 2012. During the same period, its digital ordering system mobile app was downloaded approximately 6 million times. As of the second quarter of this year, its mobile app now covers 95% of smartphones in the U.S. The app is also available in Windows Phone 8.

Financial Overview

The latest quarter results of Domino's Pizza showed strong performance that beats estimates. Diluted EPS jumped 21.3% year-over-year from $0.47 to $57 per share. Revenue also improved by 10.1% from $376.124 million during the second quarter of 2012to $414.009 million this year. Likewise, net income soared 18.5% during the quarter at 33.3 million compared to $28.1 million net earnings a year ago.

During the second quarter, the company's owned units grew 5.7% while its franchises rose 6.8%. Its domestic comps were higher by 1.7% versus the year-ago level. The impressive quarter performance was driven by several catalysts that include high comparable restaurant sales growth, unit expansions, improved royalty revenue, and better supply-chain revenue.

Store Count Growth

One of the major drivers of sales is the store count. Obviously, the higher the number of outlets the higher the revenue; however, not every store is profitable. In fact, Domino's Pizza shut down 11 domestic stores and 15 international stores during the second quarter of this year. But it also opened 20 domestic restaurants and 116 international outlets. All-in-all, the company's total domestic stores are 4,932 units and 5,508 international stores, or a total of 10,440 outlets worldwide.

Sequentially, the domestic store count grew by 9 stores, while the international store count increased by 101 stores. As a result of the additional outlets, both domestic and international, same-store sales in the United States were up almost 7%, while international same-store sales improved by approximately 6%.

The Competitive Landscape

While Domino's Pizza ended the quarter with good quarter performance, it is facing tough competition in the market. It is still not the global leader in the pizza industry. The title is currently held by Pizza Hut of Yum! Brands. So how does Domino's Pizza fare against the market leader?

In terms of same-store sales, Domino's Pizza performed better by posting growth. Pizza Hut, on the other hand, has declining same-store sales in the U.S. for three consecutive quarters; sales during the second quarter declined by 2%. In 2012, Pizza Hut's international net unit growth in the pizza category was 454 units, while Domino's Pizza has higher growth at 492 units.

However, Pizza Hut is not the only major competitor in the market. Papa John's Pizza is trailing behind Domino's Pizza at the third spot. In fact, it is also a leader in its own league.

Pizza Hut may be the leading pizzeria worldwide, but it is not the best in pleasing customers. In this case, Papa John's Pizza (PZZA) is the highest-rated pizzeria in customer satisfaction based on the American Customer Satisfaction Index (BATS:ACSI). It topped the survey not just for one year but for the past 14 consecutive years. No doubt, it has a market on its own.

Although, the company's total store count of 4,252 at the end of the year 2012 was a far cry from Pizza Hut's numbers at 11,912, its steady popularity in satisfying customers still poses a threat to both Pizza Hut and Domino's Pizza.

Market Overview and Outlook

All three pizzerias are growing. It's because the entire market grows both domestically and globally. Today, pizza is already a $40 billion industry, and about 93% of Americans consume at least one slice of pizza every month. This is equivalent to 350 slices of pizza every second.

Every year, more than 5 billion pizzas are sold globally; from this number, about 3 billion are sold in the U.S. Indeed, the market is huge and there is more room for growth for the leading pizzerias in the world.

While there are several factors that contribute to success, the pizzeria with the highest store count gets the bigger slice of the market. Pizza Hut has the highest number of stores worldwide, while Domino's Pizza is closely trailing behind.

The international store count of Domino's Pizza is currently ranked among the top 5 of all publicly-traded restaurant firms. In fact, it has the highest international store-count growth at 43%, while Yum! Brands is far behind at 23%. For the last 5 years, Domino's Pizza opened more stores than Pizza Hut, and at the current pace of expansion by Domino's Pizza, there is bigger chance for it to grab the top spot from Pizza Hut soon.

International Store Count Annual Growth
Int'l Store Count 2008 2009 2010 2011 2012
Pizza Hut 249 104 175 257 454
Domino's Pizza 257 346 350 413 492

Papa John's Pizza

140 100 87 47 137

Last year, Domino's Pizza introduced the Handmade Pan Pizza in its menu. Since then, it has become a major growth catalyst for increased sales during the past two quarters. Today, the Handmade Pan Pizza accounts for 20% of the company's pizza sales in the United States. This is projected to maintain the sales growth momentum in the ensuing quarters.

The company's innovation in digital delivery continues to create impact on its revenues. Its digital ordering system that brought in about $2 billion of sales last year is seen to drive its sales up again this year. Domino's CEO sees about 35% to 40% of the company's orders will come from digital for this year.

Investing Recommendation

DPZ Chart
(Click to enlarge)

DPZ data by YCharts

The remarkable financial performance of Domino's Pizza is reflective of its performance in the stock market. For this year, shares jumped 36.87% as of August 28. It is projected that the current uptick momentum will be maintained towards the end of the year, and will be mainly driven by demand and expansions.

On July 16, Stifel initiated a 'buy' rating for Domino's Pizza. For the past three months, majority of the analyst firms in Yahoo gave a 'hold' rating, while some recommended a 'strong buy' rating. At its present growth amidst the rising pizza industry, Domino's Pizza looks attractive for investing with great potential to earn from both short-term and long-term trade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Restaurants
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here