Its core product is built from just a few widely available ingredients and prepared using cooking procedures that any rival could mimic. But Domino's (NYSE:DPZ) has still managed to build a defensible fortress around its pizza delivery business, with a leading 27% share of the U.S. market.
The chain faces challenges in protecting that valuable position at home -- and in extending it into international markets. Updates on these core initiatives will be front and center for investors when the company announces its third-quarter earnings results before the market opens on Tuesday, Oct. 17. Below, we'll look at a few key trends to watch in that report.
Domino's has enjoyed an impressive run of 29 consecutive quarters of positive same-store sales growth in the core U.S. segment. The pace of gains has slowed recently, though, with comps dropping to 8% in 2017 from 10% the prior year and 12% in 2015.
The company is still outgrowing industry rivals by a wide margin, and investors are looking for confirmation of that healthy market share trend in the form of same-store sales gains in the high single-digit range this week. The metric was 7% last quarter and 8% at the start of fiscal 2018.
The international segment has an even longer growth streak, but its expansion has been weaker lately, with gains dipping to 4% last quarter. Executives said in late July that this decline should be temporary, so Domino's should start showing rebounding sales over the next few quarters.
The store footprint
Domino's has managed phenomenal growth in its footprint, with global locations passing 15,000 recently, up from 10,000 in 2012. Management believes it has room to add many thousands of additional shops, too. The stores focus on take-out and delivery, after all, so they require less room and are far more efficient to operate than larger restaurants.
The company has added a net 900 new locations over the trailing 12 months, with about 70% of that growth coming in international markets. Domino's already covers the U.S. segment fairly well, but the company sees opportunities to deepen its footprint -- for example, by attacking the takeout segment more aggressively. With that focus in mind, look for CEO Ritch Allison and his team to spend time commenting on the financial strength of its latest crop of stores, and on the pipeline of new launches they have lined up for the coming months.
Domino's should also update investors on its annual spending plans, considering it recently hiked that target up to as much as $120 million in 2018. The volume of products moving through its system has risen 50% over the last five years, after all, so executives are responding by building two new supply centers in the U.S. market. Domino's also needs to spend aggressively on innovations that help it maintain its lead in digital ordering and delivery.
Finally, keep an eye on the company's debt. At just under $4 billion as of late July, that figure represents a large burden given Domino's $12 billion market capitalization. The interest payments are manageable, at about 4% of sales, though, and it makes sense for the company to make smart use of debt through its aggressive growth phase. As long as its global operating and financial metrics stay healthy, Domino's is likely to keep prioritizing store expansion over paying down its long-term liabilities.