Domino’s Pizza (NYSE: DPZ) has had an incredible run over the last few years that shows no signs of ending anytime soon. In fact, the restaurant chain just announced market-beating sales growth as it crossed 15,000 global locations, up from 10,000 in 2012.
During the company’s recent earnings call, new CEO Ritch Allison and his executive team added context to the recent operating results while explaining why they feel confident that Domino’s can add at least 8,000 more stores around the world over the long term.
Here are a few highlights from that presentation.
1. Healthy growth at home
We have a collection of top-notch master franchisees who are continuing to learn from insights and global best practices, focusing on value and emphasizing the importance of growing transactions, prioritizing traffic over ticket and avoiding the price-take trend we see taking place throughout most of the industry.
— CEO Ritch Allison
Domino’s gained market share with a robust 7% uptick in comparable-store sales in the core U.S. market last quarter. Combined with the prior quarter’s 8% spike, the chain is well positioned to post strong growth for the full year. Yet its comp sales growth is likely to be a bit below the double-digit rates that investors saw in fiscal 2015 and fiscal 2016.
2. International challenges are fixable
… [O]ur international unit growth has admittedly been a bit slower than our historic norms during the front half of 2018, but I continue to stress my confidence and expectation that this will normalize on a full year basis.
The international division didn’t fare as well, with comp sales growth slowing to 4% from 5% in the prior quarter. Both of those figures were a bit below management’s hopes, but executives said they weren’t worried about the health of that segment. They explained that this year’s growth has been driven by rising customer traffic. That success should support faster overall growth in international markets during the coming quarters as average order values increase.
3. Steady margins
… [O]perating margin for the quarter increased to 37.7% from 30.7% in the prior-year quarter. This increase resulted entirely … from the new revenue recognition accounting guidance…”
— CFO Jeff Lawrence
Investors shouldn’t read too much into the spike in profitability that Domino’s reported since it was driven by a shift in the way the company accounts for certain advertising costs. Excluding that change shows margins holding steady as the higher sales base and falling income tax expenses offset Domino’s increased spending on labor and certain ingredients like cheese.
4. Spending will rise
With volumes up more than 50% in just the last five years, it is time to accelerate our investments in supply chain capacity, both to serve current demand and to support our growth plans going forward.
Management said it saw no reason why the company would miss its broader annual sales targets this year. This implies steady or faster growth in the international segment over the next two quarters.
As for costs, the chain is preparing to significantly ramp up its investments both in its supply chain and around tech innovations. Adding two new supply centers in the U.S. market will push 2018 capital spending up to between $115 million and $120 million, compared to the prior forecast of between $90 million and $100 million.
Domino’s also plans to aggressively roll out enhanced ordering and delivery functionality to protect its status at the cutting edge of this niche. “Getting a lead [in digital innovation] is one thing,” Allison explained, but “keeping it is another.” That’s why investors can look for more moves like Domino’s recent “Hotspots” initiative, which will come with higher costs — at least in the short term.
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