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Domino's (DPZ) Sales Building Efforts on Track, Costs High

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Domino's Pizza, Inc.’s (DPZ - Free Report) strong international presence, sales-building initiatives and franchising strategy have been working in favor of the company. The stock has seen a gain of 46.7% in a year’s time, outperforming the industry’s collective rise of 9.1%. However, high cost of sales and currency fluctuations is a concern.
 
Catalysts Driving Growth

The company’s sales-building initiatives like the re-imaging of restaurants are driving the top line. The company is also investing heavily in technology-driven initiatives, like digital ordering, to boost sales. Meanwhile, its digital loyalty program — Piece of the Pie Rewards — continues to contribute extensively to traffic.

The company also continues to expand its presence in high-growth international markets to boost business as major chunk of its revenues comes from outside the United States. The company sees robust international growth on exceptional unit level economics. Meanwhile, we believe that Domino's solid brand position might continue to boost sales in the upcoming quarters.

Notably, the second quarter of 2018 marked the 98th consecutive quarter of positive same-store sales in its international business. The company reported positive comps in all four geographic regions, with gains in the Americas and Asia Pacific being the maximum. Domino’s opened 829 net new stores in international markets in 2017 and 113 net stores in second-quarter 2018.

In the second quarter of 2018, revenues in the quarter increased 24% year over year to $779.4 million on increase in supply chain volumes owing to robust order and store count growth. Moreover, adjusted earnings of $1.84 per share increased 39.4% on a year-over-year basis driven by higher net income and lower diluted share count as a result of share repurchases. Moreover, the company’s major focus on re-franchising minimizes its capital requirements and facilitates earnings per share growth and ROE expansion.




Concerns

Though the aforementioned factors instill hope, increasing costs and currency headwinds raise concerns. A number of sales-building efforts like the re-imaging of restaurants and the implementation of technology are driving costs. It has been seen that in the second quarter of 2018, cost of sales increased 11.5% from the year-ago quarter. Moreover, higher labor costs due to Obamacare and other general and administrative expenses might exert pressure on margins.

Additionally, the company’s high vulnerability to fluctuations in exchange rates poses threat. We believe strengthening of the dollar against certain currencies, including the British pound, is likely to impact the company’s results.  

If we look at the valuation metric, the company looks expensive. Considering price-to-earnings (P/E) ratio, the company looks overvalued when compared with the industry. The stock has a trailing 12-month P/E ratio of 41.02, which is above the median level of 38.04 but below the high level of 44.78 reached in the past year. Meanwhile, the trailing 12-month P/E ratio for the industry is 24.72.

Zacks Rank & Stocks to Consider

Domino's carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Chanticleer Holdings, Inc. (BURG - Free Report) , BJ's Restaurants, Inc. (BJRI - Free Report) and Dine Brands Global, Inc. (DIN - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chanticleer Holdings has an expected earnings growth rate of 12.9% for the current year.

BJ's Restaurants has an expected earnings growth rate of 50.4% for the current year.

Dine Brands Global has an expected earnings growth rate of 36.4% for the next year.

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