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Domino's (DPZ) Outpaces Industry in the Past 6 Months: Here's Why

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The restaurant industry has been grappling with traffic decline over the past six months. However, shares of Domino's Pizza, Inc. (DPZ - Free Report) have surged 22.2% in the same time frame, against the industry’s decline of 3.1%. The company has been benefiting from a solid digital ordering system and higher global retail sales. This along with focus on robust international expansion bodes well. However, coronavirus woes and high debt remain concerns. Let’s delve deeper.

Factors Driving Growth

Domino's continues to benefit from high digital ordering. During the second quarter of 2020, the company-initiated car-side delivery, thus enabling convenient and contact-free carryout experience for its customers. During the third quarter fiscal 2021, the company made substantial progress regarding its Carside Delivery. With consistent waiting time averaging below two minutes, franchisees and operators have enthusiastically embraced this new service method. It was also successful in bringing in new customers. During the quarter, the company initiated a pilot version of its new Pulse point-of-sale system to bolster the productivity of its stores. Given the ongoing development and evolution of the product, further investments in this direction are likely.

Meanwhile, the company’s international growth continues to be strong and diversified across markets, courtesy of exceptional unit level economics. Third-quarter fiscal 2021 marked the 111th consecutive quarter of positive same-store sales in its international business. Improvement in comps can be attributed to ticket growth. This was driven by the return of non-delivery service methods, the resumption of normal store hours and the reopening of international stores (that were closed in the prior-year quarter). Meanwhile, the company inaugurated 323 (45 net U.S. stores and 278 net new international stores) global net store openings during third-quarter fiscal 2021.

During the fiscal third quarter, the company accelerated the pace of global store growth on a trailing four-quarter basis. It has opened 1124 net new stores, which shows an increase of 500 from fourth-quarter 2020. Solid store openings were witnessed in India, with the count rising to 1400. The company initiated its 93rd international market with a store opening in Lithuania. Going forward, the company is confident about its two to three-year outlook of 6% to 8% annual global net store growth.

The Zacks Rank #3 (Hold) company continues to impress investors with robust margin growth. In third-quarter fiscal 2021, the company’s operating margin expanded 120 basis points (bps) year over year to 38.6% compared with 37.4% in the prior-year period. Operating margin expansion was primarily driven by an increase in revenues in its global franchise business. Net income margin for the quarter was 12.1%, up 190 bps from the prior-year level. However, company-owned store margin (as a percentage of revenues) was flat year over year at 19.8%.

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Concerns

At the end of third-quarter fiscal 2021, fewer than 175 stores (majority located in India and New Zealand) were temporarily shut due to the pandemic. During the quarter, COVID-19 continues to have a significant impact on several of the company’s international markets. The company announced that coronavirus pandemic will continue to hurt international markets for the upcoming quarters.

Managing liquidity has become a herculean task during the coronavirus pandemic. Long-term debt, as of Sep 12, 2021, was $5 billion, almost flat sequentially. The company ended the fiscal third quarter with cash and cash equivalent of $295.4 million compared with $292.1 million in the previous quarter. Although cash and cash equivalent has increased sequentially, it might still be difficult to manage a high debt level.

Key Restaurant Picks

Papa John's International, Inc. (PZZA - Free Report) currently carries a Zacks Rank #2 (Buy). The company has been benefiting from its off-premise business model. Sales at off-premise business model has exceeded pre-pandemic levels. We believe that a rise in customer count coupled with targeted off-premise marketing are likely to drive the channel’s performance in the days ahead.

Papa John's has reported better-than-expected earnings in three of the trailing four quarters, the average surprise being 27.2%. The company’s fiscal 2021 earnings is likely to witness growth of 138.6%. PZZA stock has gained 48.2% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Del Taco Restaurants, Inc. has a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 25.7%, on average. Shares of the company have gained 3.3% in the past three months.

The Zacks Consensus Estimate for Del Taco Restaurants’ current financial year sales and earnings per share suggests improvement of 7.2% and 33.3%, respectively, from the year-ago period.

Kura Sushi USA, Inc. (KRUS - Free Report) carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 15.6%, on average. Shares of the company have soared 225.1% in the past year.

The Zacks Consensus Estimate for Kura Sushi’s current financial-year sales and EPS suggests growth of 108% and 85.7%, respectively, from the year-ago period’s levels.


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