Is Domino’s Pizza Stock A Buy?

As the world’s largest pizza chain, Domino’s is well-placed to capitalize on this market opportunity. Indeed, with an established online platform and distribution network already in place, the company thrived during the coronavirus pandemic a couple of years ago.

 

Lockdown and social distancing measures saw a massive spike in home-delivered food orders, and DPZ’s revenues grew 14% to hit $4.12 billion by the end of 2020. However, it’s not been all plain sailing for Domino’s since then.

 

The firm’s share price has fallen 40% this year, and regardless of some tough comparisons, its sales only increased by 6% in 2021.

 

That said, Domino’s delivered “one out of every three pizzas” in America before the pandemic – and it still delivers one out of every three pizzas today. But is that enough to make this famous brand a sensible stock pick right now? Is Domino’s Pizza stock a buy?

 

 

The latest report card detailing Domino’s third-quarter results was relatively muted. The company’s diluted earnings per share fell 13.9% year-on-year to $2.79, while revenue of $1.07 billion was in line with what Wall Street analysts had previously predicted.

 

However, digging down a little deeper reveals some positives for the Ann Arbor-headquartered multinational. For instance, the firm garnered robust sequential U.S. same-store sales growth of 2.0% this quarter – compared to a loss of 2.9% for the prior period – while, excluding for the adverse effects of foreign currency, its global retail sales were also up 4.7%.

 

On top of that, Domino’s overall sales rose 7% annually and, if it weren’t for a value-added tax holiday in the U.K. in the third quarter of 2021, the company’s international same-store sales likely wouldn’t have registered a fall of 1.8% this time round either.

 

Despite this positive gloss, it’s not clear where DPZ can find the resources to continue expanding at its present rate. In fact, Domino’s growth metrics have been pretty strong across the board.

 

Its global store count has been rising at a compound annual growth rate of 6.6% since 2010, with the company now boasting 19,519 current outlets. There’s a similar pattern with DPZ’s estimated average U.S. franchise store EBITDA, which has also been growing at a CAGR of 10.2% over the last eleven years too.

 

But some critics argue that Domino’s has been fudging its own growth story by driving its sales numbers through new store openings rather than more organic means.

 

In its defense, though, the company cites a bevy of headwinds for its slow domestic growth, from rising inflation to an acute shortage of delivery drivers and other lynchpin workers.

 

The restaurant industry has always been a fickle business. With low barriers to entry, the field is saturated with market participants both old and new, leading to intense competition that drives down margins and puts pressure on a company’s bottom line.

 

In addition, the hidden costs of running a restaurant can be substantial, ranging from food and labor costs to overhead expenses such as rent and utilities.

 

Furthermore, the space is often exposed to certain macroeconomic headwinds that tend not to afflict other organizations in other industries. For instance, during periods of economic decline, consumers may cut back on dining out, opting instead for cheaper alternatives such as home cooking or prepackaged ready meals. These factors can make restaurants a risky proposition, not least for investors looking to purchase stock in the sector.

 

It’s fortunate, then, that Domino’s isn’t your typical pizza company. In fact, the firm only owns 2% of its branded stores, significantly de-risking the business from many of the usual pitfalls inherent in the restaurant game.

 

Truth be told, franchising out the remaining 98% of its business to privately owned ventures is a clever tactic for an outfit like Domino’s.

 

By doing so, DPZ can essentially create a network of self-employed traders working under its instantly recognizable banner, giving the company more flexibility – and, crucially, putting the funding burden of each store almost entirely on its owner-operators’ shoulders.

 

There is, however, a problem with this.

 

The firm’s margins have been tightening lately, and that’s manifested itself in weakening earnings growth. But as Domino’s attests in its publicity literature, it is “One Brand, One Store, Two Businesses.” Those two businesses are delivery and carryout, which also happen to be the two largest segments in QSR pizza.

 

Yet, DPZ takes 22% of the American pizza market and 20% of the global market too. And if it can’t find a way to grow its operations from here on out – which will be difficult given its already considerable market share – it’s hard to see how its top line will improve anytime soon.

 

Sure, the company’s share buy-back scheme will help alleviate its profitability woes somewhat, but that could just be a sticking plaster rather than a serious solution.

 

With the stock having performed so poorly in 2022, Domino’s shareholders would be forgiven for thinking the firm’s distribution yield might have risen significantly this year. Indeed, the compensation of a juicy dividend payout would go some way in making up for the capital that investors lost throughout the year.

 

Unfortunately, while DPZ’s yield has undoubtedly increased, it still only stands at a relatively modest 1.37%. However, the firm’s 5-year dividend growth rate is a remarkable 19.2%, which makes it an excellent choice for those seeking income appreciation over the long term.

 

Moreover, its payout ratio is a respectable 34%, meaning that, all other things being equal, Domino’s dividend should be safe for quite a while yet.

 

There are too many uncertainties surrounding the future direction of Domino’s business to make it a viable stock pick at the present time. However, if it can reverse its earnings decline and show improvement in its top line, the company may become more attractive later on. That said, its dividend is growing rapidly, which might be a good fit for an income-oriented portfolio.