Will Domino's Pizza Continue Outperforming in a Competitive Environment?

Domino's posted strong results recently, but will its online investments help it stay ahead of rivals?

May 27, 2014 at 12:17PM

The pizza industry is highly fragmented and intensely competitive. Innovation is the key to survival in this highly competitive market, which means a strong online presence is also important. Domino's Pizza (NYSE:DPZ) has established a strong position in the pizza industry on the back of both innovation and technology. This shows in the company's stock price performance, which is up more than 20% in the last one year.

However, with competition rising from the likes of Papa John's (NASDAQ:PZZA) and Yum! Brands' (NYSE:YUM) Pizza Hut, will Domino's be able to sustain its solid performance? Let's find out.

Robust results
Primarily using a franchise-driven business model, Domino's Pizza has delivered consistently good results. The momentum continued in the first quarter of fiscal 2014, leading to global sales increase of 9.1% year-over-year. On the heels of robust top-line growth, earnings surged 15.3% versus the year-ago quarter despite headwinds of currency and higher input costs. 

Domestic and international same-store sales grew 4.9% and 7.4%, respectively, versus the year-ago quarter . In addition, five new domestic net stores and 97 international net stores fueled top-line growth. Menu innovations and investments in technology are also resonating well with consumers and driving organic growth for Domino's. After its recent agreement with Taste Holdings  in South Africa, Domino's growth momentum should also continue as the majority of 150 Taste Holdings outlets will be converted into Domino's units.

Technology-driven growth
Domino's leads the industry with technological innovations. It recently launched an iPad app, which includes the new pizza builder with 3D graphics to take advantage of the iPad's high-definition retina display. It also announced the integration of Google's payment service -- Google Wallet -- to its Android app. These moves should enhance the customer experience, leading to more orders in the long run due to the ease of use that Domino's is trying to offer.

Another customer-focused innovation -- profiles -- allows consumers to store their pizza orders and credit card information. During the previous quarter, two million profiles were added, bringing the total to 9 million. This move has clicked with consumers as almost half of the mobile app sales were through established profiles. Overall, digital sales accounted for 45% of total sales in the quarter, up from 40% in the preceding quarter .

Domino's has also launched an Easy Order app using the SYNC AppLink System in collaboration with Ford. This is another move which should make ordering easy for customers and ultimately lead to an improvement in orders. Moreover, digital moves such as these are important since other players are also tapping this channel aggressively.

Rivals presenting credible threats
Papa John's was ahead of Domino's in digital sales, with more than 45% sales in fiscal 2013  coming from the digital platform. Online ordering at all of its U.S. delivery restaurants started in 2001, and thirteen years later, Papa John's is still setting the pace in this department. During the first quarter of fiscal 2014, nearly 60% of all domestic delivery sales were through digital channels as compared to 45% of Domino's.

Papa John's has started rolling out its new point-of-sale system -- Focus -- which is designed to bolster store-level productivity and profitability. The company delivered strong North American and international comps of 9.6% and 6.4%, respectively, versus the year-ago quarter . Its digital initiatives and menu innovations are driving growth, making Papa John's a potent threat to Domino's market share.

Yum! struggled last year, but it is looking to make a comeback. During the first quarter of fiscal 2014, comps in China increased 9% year-over-year, contributing to 17% sales growth versus the year-ago quarter. The success story of Pizza Hut in China is based on menu innovations, as the company refreshes around 20% of the menu every six months.

Both Domino's and Pizza Hut have around 5,000 delivery-focused units in the United States. China, on the other hand, has only 200 delivery-focused Pizza Hut units. Going forward, Yum! will expand aggressively in this area in China and this will fuel growth going forward. This is because China has a large and growing class of consumers, which is expected to double from 300 million to 600 million by 2020 .

Final words
Domino's management knows that the battle in the pizza industry is now being fought digitally. The company is aggressively investing in its online sales platform to drive growth going forward. Analysts also expect the same as the company's earnings are expected to grow at a rate of 15% a year for the next five years, while a dividend yield of 1.40% makes an investment in Domino's even more enticing. Investors should definitely consider this company's stock for their portfolio.

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Ayush Singh has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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