It sells an easily replicated product that's not substantially different from the cheesy meals cooked by any of the thousands of privately owned pizza shops that span the country. And yet Domino's (DPZ 1.97%) extended its impressive business rally last year by soaking up market share and generating solid profit growth for its shareholders.
Investors rewarded the stock by sending it 31% higher following 2017's double-digit performance. Here's why.
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Steady growth
Domino's started the year with mixed results. Its fiscal fourth quarter showed significant growth at existing restaurants both in the U.S. and internationally. However, that expansion pace slowed on both counts even though it outpaced rivals like Yum! Brands' Pizza Hut. There was more good news than bad in the year's first report, including rising profitability and a quickly growing global store count.
The pizza chain hit the accelerator over the following months. When every restaurant chain in the wider industry seemed to push into the home delivery niche, Domino's demonstrated over the next few quarters why it remains the leader in that arena. Sales gains jumped in the first quarter to mark its 28th consecutive quarter of positive results in the U.S. The international business sped up, too.
Domino's then introduced technical advances to go along with its usual menu upgrades and limited-time offerings. Its "hotspots" program added 200,000 non-traditional delivery locations (like parks and beaches) to its footprint to help extend the positive sales momentum into the second quarter. The chain wrapped up the calendar year with healthy third-quarter growth in just about every market that left rivals like Papa John's far behind.
An enduring competitive advantage?
All the positive sales growth supports management's plan to add thousands of new Domino's locations to their global footprint over the next few years. The chain opened 140 delivery hubs in the U.S. market over the first three quarters to make it one of the fastest growing franchises in the country. There could be room for many more locations, executives argue, as the chain attacks the huge take-out niche.
Domino's has wider ambitions away from home, where its small store square footage gives it flexibility to go up against established restaurant rivals while stressing price, food quality, and convenience.
When judging a potential investment in the Wall Street darling, investors have to weight those benefits against key risks, including high debt or the potential that Domino's competition will catch up to it, either with respect to food quality or the speed and ease of delivery offerings. The latter point is a concern given that deep-pocketed peers, including McDonald's and Starbucks, are pouring resources into that arena right now.
For the year ahead, shareholders might see Domino's sacrifice profitability so that it can defend its recent market share and technological wins. A persistent growth slowdown at existing stores, meanwhile, would likely stop the stock's rally in its tracks.
On the other hand, as long as Domino's can keep finding ways to boost market share, just as it has for over a decade now, then the outlook is bright for this delivery-focused pizza specialist. Whether it's through international expansion or a push into carry-out for mature markets like the U.S., the chain has no shortage of opportunities to extend its brand into new niches.
Check out the latest Domino's earnings call transcript.
