DPZ: CONTINUING TO TAKE SHARE

Domino’s reported 3Q earnings this morning and confirmed what we already knew: its focus on technology and the consumer experience has helped the company take share from competitors.

 

DPZ reported 3Q11 earnings this morning that beat expectations on the top and bottom line. EPS came in at $0.35 vs expectations of $0.33.  Same-store sales came in at 3.0%, 4.2%, 2.6% and 8.1% for Domestic, Company, Franchise, and International restaurants, respectively.  Each print was ahead of expectations.  

 

Technology was a key theme of the call.  The increased consumer “mobility” is changing how consumers connect with restaurants.  A key difference is emerging between companies that can put technology to work and drive incremental transactions and those that can’t.   SBUX is another example of a company successfully leveraging technology to drive sales.

 

Below are our Top Ten Takeaways from the quarter and management’s commentary during the earnings call:

  1. Domino’s is changing the business. Digital sales – mobile and online ordering – are now approaching 30% of total sales.  This number grabbed our attention and, we believe, lies at the core of DPZ’s market-share story.  The ordering experience being that much better than before, together with the improved pizza launched in ’10, is helping the company “comp the comps” despite extremely difficult double-digit compares.  In Asia, in particular Japan and Korea, the percentage of digital orders is pushing 50%.  Within the US, 1.5% of sales in the quarter came off the iPhone app alone.
  2. The company’s top-line is as healthy as any in the industry; the top-line compares on a year-over-year basis were extremely difficult and the company posted strong a strong acceleration in company same-store sales two-year average trends (first chart below).
  3. The comp growth and margin expansion bodes well for the stock (second chart below).
  4. The company’s margin expansion in the face of elevated cheese costs was impressive; the company’s price of cheese per pound in the quarter was $2.08, up 36% year-over-year and 24% quarter-over-quarter.   By the end of the third quarter, the price had come down to $1.79 and the company expects similar levels for the remainder of the year.  The company reiterated its expectation that its overall market basket for 2011 will be between 4.5% and 6% above 2010 levels.
  5. Refranchising has helped the company avoid margin headwinds from increased costs.  Consolidated operating margin actually expanded by 36 basis points year-over-year to 27.5% as a result of a change in the mix of revenues due to fewer company-owned stores and increased franchise revenues and also an increase in company-owned store operating margin.
  6. Company-owned operating margin increased 2.6% year-over-year because of labor efficiencies and lower insurance expenses offset by cheese and meat inflation (third chart below).
  7. The company intends for the “$7.99 for two” price point to become a permanent addition to the menu.  Even at that low price, management says that the company and franchisees are happy with the impact on the bottom line.
  8. The company is going to continue to buy back shares as a means to return value to shareholders.
  9. While the international business is now approximately equal to the domestic business in size, the population of the US versus the countries that constitute the international markets is only 5%.  Management maintains that there is huge runway for growth in international markets.
  10. Sell-side sentiment on the name is not bullish.  There is room for upgrades and, as is typical, when bullishness reaches peak levels it will be a signal to consider becoming cautious (fourth chart below).

 

DPZ: CONTINUING TO TAKE SHARE - dpz pod1

 

DPZ: CONTINUING TO TAKE SHARE - dpz quadrant

 

DPZ: CONTINUING TO TAKE SHARE - DPZ domestic co marg vs cheese

 

DPZ: CONTINUING TO TAKE SHARE - dpz sentiment

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst