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Domino's Pizza Expands Globally, Counters Higher Food Costs

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On Jul 4, 2014, we issued an updated research report on Domino's Pizza, Inc. (DPZ - Free Report) .

On May 1, this pizza delivery company posted solid first quarter results wherein both earnings and revenue beat the Zacks Consensus Estimate. Adjusted earnings of 68 cents per share increased 15.3% year over year driven by higher revenues, margin expansion and a lower share count.

Quarterly revenues jumped 8.7% year over year to $453.9 million driven by higher supply chain revenues. Supply chain revenues increased owing to higher commodity prices and volumes and improved domestic and international comps.

Domino’s Pizza has been posting impressive results for the past few quarters on the back of higher traffic at its restaurants and unit growth. The company’s international operations promise significant growth potential. Since Domino’s earns the majority of its revenues from outside the U.S., it is committed to accelerating its presence in the high-growth international markets. Domino’s has established its presence in 70 countries.

Further, Domino’s Pizza has undertaken several brand revitalization initiatives such as menu innovation, store expansion and re-imaging existing stores to significantly drive its revenues. We believe the company’s foray into newer categories like Pan Pizza and Specialty Chicken and the re-imaging of its restaurants will help to sustain the top-line momentum.

Domino’s is also investing heavily in technology-driven initiatives like digital ordering in order to boost its sales. The digital wave has hit the U.S. fast casual restaurant sector as more and more restaurants are deploying technology to enhance guest experience. Therefore, we believe that the company’s digital ordering system and technological innovation will further add to its revenues.

However, like other food chains, Domino’s also has to bear the brunt of higher commodity costs. In 2014-2015, prices of food commodities are expected to be under pressure due to worldwide agricultural supply and demand imbalance and other macroeconomic factors. In fact, costs of cheese, pork and other meats have risen sharply in the recent past. These costs are expected to hurt margins further. The company expects commodity costs to increase in the range of 4.0% to 6.0% in 2014, higher than its previous expectation of flat-to-down 2.0%.

Though the sales building initiatives taken by the company will reap long-term benefits, they will put pressure on margins in the near term. Moreover, a weak consumer spending environment owing to macroeconomic pressure is also a headwind.

Domino's Pizza presently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the retail sector include BJ's Restaurants, Inc. (BJRI - Free Report) , Red Robin Gourmet Burgers Inc. (RRGB - Free Report) and Chipotle Mexican Grill, Inc. (CMG - Free Report) . While BJ's Restaurants sports a Zacks Rank #1 (Strong Buy), Red Robin Gourmet and Chipotle Mexican hold a Zacks Rank #2 (Buy).

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