Why Domino's Digital Component Is Important

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Domino's Pizza (NYSE: DPZ  ) has seen impressive increases in customer satisfaction and earnings growth over the past year. There is, however, an unexpected component for us to investigate to understand just how innovative Domino's has become under CEO J. Patrick Doyle's leadership.

Domino's key ingredient: technological innovation
550 individuals work at Domino's headquarters in Ann Arbor, Michigan. Out of those 550 employees, approximately 170 work in its largest department: technology. 30% of the employees at Domino's HQ work to design mobile apps, develop and analyze Domino's websites, and perform other digital duties. Not exactly what I would expect from a pizza maker.

One of Domino's core strengths is its technological innovation. Domino's mobile apps are now available to 95% of the mobile phone market, including apps for the iPhone, Android, and Windows 8, with an app specifically for the iPad on the way. Digital sales, which include mobile and computer ordering, now make up 40% of all Domino's sales (up from 30% in 2012). In India -- one of Domino's largest and fastest-growing markets with over 600 stores -- digital sales make up 20% of total sales. In the third quarter of 2013, sales from mobile devices increased 102% in the United Kingdom.

Michael Lawton, CFO, believes mobile apps represent an opportunity to develop customer loyalty (which is uncommon in the pizza field). Think about it: if someone downloads a mobile app, uses it to order a pizza, and is satisfied with the experience, they will use the app any time they want to order a pizza. Hassle-free and quick ordering, coupled with customer profiles being developed by Domino's (which remembers your pizza preferences for online and mobile ordering), will entice customers to remain with a certain pizza maker. Domino's is prepared for this market shift.

Noah Glass, founder of OLO -- an online and mobile ordering firm -- states it bluntly, "Smart restaurants will evolve to meet changing consumer needs with mobile ordering and payment experiences."

The benefit of "digital sales" is two-fold. Customers can order a pizza without making a phone call; a pizza can be fully ordered and paid for through a mobile device or computer. Less hassle to order equals higher order frequency. This helps Domino's employees concentrate on completing orders in a timely manner, saving time and money for Domino's.

Smartphones now make up 60% of all mobile phones in the U.S., and the rest of the world is following suit digitally. Mobile ordering is the direction the pizza market is heading, and Domino's has the employees and infrastructure to capitalize on this movement.

What are Papa John's Pizza and Yum! Brands doing?
While Domino's certainly has the personnel and infrastructure to continue its technological innovation, it is by no means the only pizza maker taking advantage of the growing digital market. Papa John's Pizza  (NASDAQ: PZZA  ) is also heavily invested in mobile ordering, claiming that 45% of its sales now come through digital avenues. Papa John's recently surpassed $5 billion in cumulative systemwide digital sales.

Yum! Brands'  (NYSE: YUM  ) Pizza Hut is also engaged with mobile ordering and digital sales, while maintaining the largest social media presence of pizza makers on sites such as Facebook, Twitter, Pinterest, and YouTube. Pizza Hut claims 30% of its orders occur through digital channels. While Pizza Hut has surpassed $1 billion in cumulative systemwide digital sales, Pizza Hut CEO Scott Bergren acknowledges that Domino's has been more effective promoting its digital capabilities. 

Domino's does have major promise and an advantage over competitors in the global market. Since 2012, Domino's international locations have outnumbered its U.S. locations. Domino's has only implemented online ordering in 32 international countries so far, meaning less than half of Domino's international countries currently have the capability to order pizza via the Internet. As more countries become digitally connected, both with computers and mobile phones, Domino's can capitalize by expanding online ordering to a majority of its international locations. 

There is significant potential for Domino's in its continued rebranding as well as innovation in the growing digital market. Domino's is trending toward offering a more efficient and satisfying customer experience, supported by a new store design and increased utilization of technology, embracing the sustained popularity of fast-casual restaurants.

Why invest now?
Domino's stock is flirting with its 52-week high of $70.10. The stock has increased over 57% this year, and currently trades at a P/E multiple just below 30. Some may argue that the stock is trading at a slight premium; I believe the premium is warranted considering the company's improved same-store sales, earnings growth, and evidence of the Pizza Turnaround's successful implementation.

Quality leaders come in unexpected places. J. Patrick Doyle has proven himself to be an innovative leader, turning around a struggling brand with the financial results now beginning to follow suit. As Domino's continues rebranding and implements its new store design, in addition to capitalizing on a growing digital pizza market, the company's financials will increasingly reflect a more efficient pizza service and improved customer experience.

Domino's rebranding is still in a young stage of implementation. I believe the company's noteworthy success is merely a precursor for what lies ahead. An improving and innovative concept, coupled with an experienced and proven leader at the helm, leads me to believe that Domino's brightest days are still yet to be realized.  

Long-term investors might be inclined to open a small position in Domino's and add on dips, so long as the company's strengths remain intact. I expect market-beating returns over the long run as Doyle and company continue to execute one of the more innovative brand comebacks in recent memory.

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