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Domino’s Pizza, Inc. (DPZ): Are You Ignoring This Restaurant Chain?

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Jimmy Dean once said, “I can’t change the wind, but I can adjust my sails to always reach my destination.” Domino’s Pizza, Inc. (NYSE:DPZ) has proved the saying true with its first-quarter results.

In the first quarter, Domino’s Pizza, Inc. (NYSE:DPZ) grew its comparative-store sales by 8.6%. The company generated total revenue of $417.62 million and earned $0.59 per share. Analysts at Thomson Reuters had estimated the revenues to be $413.77 million and the earnings to be $0.55 per share. Its global retail sales grew by a solid 9.4% driven by domestic same store sales which rose 6.2%.

The results become even more impressive if we factor in the rising food prices and deterrents like a weak consumer spending environment and falling number of restaurants visits. This solid performance was largely due to the company’s business model, smart strategies, and global growth.

Vertically integrated business model

Domino’s Pizza, Inc. (NYSE:DPZ) has a vertically integrated business model whereby it supplies dough, thin crust, processed vegetables, and other food items to all its company-owned stores and over 99% of its franchised stores.

Food supplies are mostly made with a fixed markup on the actual purchase costs. This has been a winning strategy for the company, as it protects profits in the face of volatile food prices.

The other big advantage is that this allows Domino’s Pizza, Inc. (NYSE:DPZ) to keep solid control over the quality of food served at the franchised stores. Often, restaurant chains which follow a franchise model land in trouble on account of quality-control issues.

Domino’s Pizza, Inc. (NYSE:DPZ) runs this supply-chain business exceedingly well and has achieved a lot of operating leverage. During the first quarter, it grew its profits by over 20%, although revenue grew 11.3%.

Good retail strategies

In the current retail scene, the importance of online and mobile platforms cannot be emphasized enough. Domino’s has done an excellent job in strengthening its foothold in both areas.

The company generates around $1 billion in sales from its digital ordering platforms in the US and another $1 billion overseas. Digital ordering accounted for 35% of total sales in the first quarter

Bulls hungry for Domino's Pizza, Inc. (DPZ) options as shares rise to all-time highMeanwhile, like every other quick-service restaurant, Domino’s Pizza, Inc. (NYSE:DPZ) has started its campaigning of “Great Food at Great Value.” CEO J. Patrick Doyle aptly summarizes the situation by saying, “For under $25, including a tip for delivery, you can feed a family of four with pizza, something that we feel keeps our category strong in an uncertain economy versus other segments of the restaurant industry.”

The company is also promoting value offers like the “Double Value Deal” where it offers two regular-sized pizzas for $22 only. It has a $5 “Carry-out Lunch” offer featuring a two-topping small pizza, penne pasta or oven-baked sandwich.

International expansion

Domino’s is doing well in international markets and posted solid 6.5% growth in same-store sales during the first quarter. Due to its good value proposition, it is seeing sales growth even in Europe. The company’s UK master franchisee reported strong results.

Domino’s Pizza, Inc. (NYSE:DPZ) is in the early stages of growth in Asia. This is a relatively untapped market and pizzas are gaining popularity. The company has recently opened its 250th store in Japan and is making progress in China and India.

It opened net 80 stores internationally during the first quarter. It will be investing an additional $13 million over its 2012 spending to support and expand its international operations in 2013.

Menu reinvention and expansion

As always, the key to the success of any restaurateur lies in its ability to serve good food according to the tastes and preferences of its visitors and its ability to innovate so that it can keep them interested. Domino’s passes the test on both accounts.

One of the items worth mentioning is the high-quality, fresh-dough handmade Pan Pizza which it introduced in the fourth quarter of 2012 and has been an instant hit. In addition to driving traffic it also helps that the pizza carries a $7.99 price point for a two-topping medium version — $2 more than the regular medium, two-topping hand-tossed pizza

Domino’s Pizza, Inc. (NYSE:DPZ) has also added a number of other unique entrees, sides, and desserts to its menu. Oven Baked Sandwiches, Penne Pasta, Boneless Chicken, and Wings are all featured in the company’s restaurant and catering menu.

Competition

In the US, Domino’s competes with national chains like Pizza Hut, which is owned by Yum! Brands, Inc. (NYSE:YUM) and Papa John’s Int’l, Inc. (NASDAQ:PZZA), as well as regional players. In the international scene it is mostly pitted against Pizza Hut.

Out of the three, Domino’s has reported the best growth in the first quarter in the US. Its 6.2% growth in domestic same-store sales was no match for Pizza Hut’s 1% decline and Papa John’s 1.6% increase. This means that competitive pressures on Domino’s Pizza, Inc. (NYSE:DPZ) would increase as the rival chains engage in aggressive promotions and innovations.

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