3 Keys to This Restaurant's Future

Domino's Pizza (NYSE: DPZ  ) shares have risen nearly 65% in the past year. The third quarter report brought more good news with 7% revenue growth which compares to a 5% drop last year. Can Domino's continue to deliver?  

Its menu features the wildly popular Handmade Pan Pizza. Domino's remains committed to a slow and steady rollout of new products to keep from overwhelming customers -- and kitchens. 

The company has three other growth driving plans that could also boost returns and investor satisfaction. 

1. Franchising advantages
Domino's only operates about 4% of its more than 10,000 stores worldwide, as it prefers to take the franchise route. This model allows Domino's to collect a steady stream of money while focusing attention on overall growth. Domino's also sells food commodities to its franchisees at a constant dollar markup, which keeps fluctuating food costs from impacting supply chain profits.

The 7% third quarter revenue growth up to $26 million was mostly due to an increase in franchise royalty payments. Higher same store sales and a greater number of locations boosted royalties for the quarter. 

Same-store sales were up 5.4% domestically which compares to 3.3% in the prior year period. International same-store sales increased 5%. Domino's has opened a net 11 domestic stores so far this year and a net 300 locations internationally. 

Product renovations and location expansions cost money. Domino's has also aimed money at virtual expansion into the territory of online sales.

2. Costs of the digital age
Digital sales now account for about 40% of total U.S. sales. Domino's has invested in the technology necessary to expedite online orders which includes apps for the majority of smartphone operating systems.

However, putting this framework in place is driving up general and administrative, or G&A, expenses. It could continue to do so into the new year, though the company's not throwing around any estimates until January. G&A increased over 8% on the prior quarter to $4.1 million and the company expects to run over the $9 to $13 million predicted for this year. 

Costs come with growth. Will that growth prove enough to run with the competition? 

3. Running with the competition
The pizza industry is a competitive field but Domino's has a menu advantage. Domino's includes oven-baked sandwiches and pastas with gourmet side bread options. Papa John's (NASDAQ: PZZA  ) and Pizza Hut, owned by Yum! Brands (NYSE: YUM  ) , both stick with more conventional pizza restaurant fare. 

Yum! Brands is trading down over 4% this year and recently reported a 15% earnings per share drop. The falter was mostly due to KFC's slipping sales in China, but Pizza Hut had its own issues. A 6% comps gain in China was offset by weakness in the U.K. and a 1% comps drop domestically.

Papa John's is more directly comparable to Domino's in performance since both have a pizza focus -- though Papa's suffers from Pizza Hut's limited menu problems. Here's a look at some of the current metrics with details from the second quarter, since we're weeks away from Papa's third quarter report. 

Company

Market Cap*

EPS (ttm)

Revenue / YoY Growth (Q2)

Total Number of Stores

Same Store Sales Growth (US)

Same Store Sales Growth (ex-US)

Domino's

3.73 B

2.35

$414 million / 10%

10,440

6.7%

5.8%

Papa John's

1.57 B

2.90

$349 million / 6.7%

4,252

3.4%

6.8%

Foolish final thoughts
Domino's growth story will continue to keep costs high, but the renovated menu is already paying off. The company will hold an Investor's Day on January 15 and management should drop more details about overall operations.

Is now the time to buy Domino's? This year's gains give me reason to pause; however, I'm still putting in a long-term CAPScall of outperform and look forward to details from January's meeting.  

Note: Several facts have been adjusted from the previous version of this article. The Fool regrets the errors.


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