Domino's: Stock of the Week

This is why the company gives out half-price pizzas.

Andrew Willis 8 May, 2023 | 4:08AM
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Andrew Willis: Every now and then, Domino (DPZ)’s likes to come out with their half-price pizza days. And what customers like to call a good deal, we call “absorbing margin pressure to defend value propositions”.

Sounds complicated, but from the pizza parlour’s point of view, it’s part of a simple – yet effective business strategy. Appeal to individuals who may have traded down to frozen pizzas lately, hurting traffic numbers last quarter, and encourage foot traffic, which saves both consumers and Domino’s on delivery costs.

For Domino’s stock investors, the company’s pricing strategy isn’t the only growth driver. The firm’s “fortressing” strategy, or concentrating and building out stores within a market, also encourages carryout, which equity analyst Sean Dunlop says now makes up 40% of sales. He says the strategy has helped lift a glass ceiling on the number of “pizza units per capita” in the firm’s core markets.

With investments in delivery integration and e-commerce platforms, Domino’s already had the lion’s share of pandemic-led changes for the restaurant industry – seizing the opportunity to gain market share by 10% since 2019. For such a competitive business, it’s impressive the firm earns a wide moat and over 20% of the global pizza category.

And for those investors that may still not like Domino’s pizza even with the discounts, view them as a business, with some of the strongest store-level economics in the industry.

For Morningstar, I’m Andrew Willis.

 

bulls Bulls Say

  • Category-leading margins and compelling cash-on-cash returns will continue to drive unit growth outperformance for Domino’s.
  • The firm’s fortressing strategy allows it to capitalize on core competencies (price and convenience), cementing its leading role in the U.S. QSR pizza market, while growing carryout market share.
  • Master franchise relationships continue to push impressive unit growth in underpenetrated markets like Latin America, India, and China, which offer substantial space for greenfield development.

bears Bears Say

  • A return to dine-in traffic figures to pose a near-term headwind for Domino's, as a COVID-19 induced delivery mix-shift abates.
  • The expansion of delivery options could affect growth in guest traffic as Domino’s increasingly competes with delivery categorically rather than just the pizza category.
  • Increasing wage and commodity cost inflation may prove difficult to defray, requiring commensurately higher levels of comparable sales growth to maintain steady margins—a particular challenge for concepts like Domino's that compete predominately on value.

 

Editor's Note: All images are courtesy unsplash.com and APImages. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Domino's Pizza Inc502.16 USD0.01Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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