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Domino's Pizza Poised to Grow on Solid Comps, Risks Prevail

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On May 15, we issued an updated research report on popular pizza delivery company Domino's Pizza, Inc. (DPZ - Free Report) .

Despite the prevailing challenging restaurant environment, Domino’s Pizza has managed to hold its own. It reported robust first-quarter 2017 results on Apr 27. In fact, the company’s revenues and earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters.

Moreover, the first quarter of 2017 marked the 24th and 93rd consecutive quarter of positive same-store-sales domestically and internationally, respectively. Going forward, the company’s initiatives on the digital front, focus on re-imaging and other sales boosting strategies are expected to help sustain the excellent comps trend and drive growth.  

Growth Drivers

Domino’s Pizza continues to boost sales through regular limited time offers (LTO). Moreover, the company’s remodeling initiative is anticipated to continue enhancing its potential as a brand and augment guest experience.

Meanwhile, Domino's Pizza’s world-class digital ordering platforms like Google Home, Facebook Messenger, Apple Watch, Amazon Echo, Twitter and ordering via a Pizza emoji on text should further continue to increase digital orders. Notably, the extended ways to order a pizza has kept it in the forefront of digital ordering and customer convenience.

Moreover, per the company’s recent anywhere ordering platform innovation, customers can now place a new order for a custom-built pizza or any other item from the menu without the need of a Pizza Profile or saved Easy Order. This marks the next major step in the evolution of the company’s ever-growing suite of exclusive and revolutionary ordering platforms.

Additionally, the company is working toward reducing its ownership of restaurants and is focusing more on re-franchising as it minimizes capital requirements and facilitates earnings per share growth as well as ROE expansion.

Besides, Domino’s Pizza’s commitment to expand presence in the high-growth international market to boost its business bode well. The company’s international growth continues to be strong and diversified across markets, driven by exceptional unit level economics. In fact, many of its international franchisees continue to generate robust returns.

Concerns

We are impressed with the various sales-building efforts undertaken by Domino’s Pizza, which should offer long-term advantages. However, costs involved are expected to continue hurting margins in the near term. Also, performance-based incentives, compensation and labor costs are resulting in higher expenses and may put margins under increased pressure.

Meanwhile, given its sizeable international operations, Domino’s Pizza is exposed to risks of fluctuations in currency exchange rates that negatively impact the results of the company. Moreover, a challenging industry backdrop remains a potent cause of concern for some restaurant chains like The Cheesecake Factory Inc. (CAKE - Free Report) and Brinker International, Inc. (EAT - Free Report) and others. Though Domino’s Pizza has been faring well so far, the continued slowdown in the industry at large might hamper its prospects, moving ahead.

Bottom Line

Nevertheless, the demand for pizzas is unlikely to go down in the coming days and pizza giants like Domino’s Pizza and Papa John's International Inc. (PZZA - Free Report) ride on this certitude. In fact, shares of the company have rallied 58.5% over the last one year widely outpacing the Zacks categorized Retail–Restaurants industry’s gain of 6.9%.



Also, upward estimate revisions raise optimism regarding the stock’s prospects. The Zacks Consensus Estimate for 2017 and 2018 earnings moved north by 2.9% and 2.2%, respectively, over the last 60 days.

Regardless of certain headwinds, Domino’s Pizza’s operational advantages, given its market share and scale, along with insistent focus on innovation and execution of growth strategy should aid the stock in maintaining its solid performance, going forward.

Domino’s Pizza currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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