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Domino's Sales Trends (Finally) Rebound

By Demitri Kalogeropoulos - Feb 21, 2020 at 11:00AM

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The pizza chain beat back a flood of new rivals in the home delivery niche last quarter.

It took over a year, but Domino's (DPZ -0.40%) has finally regained its footing. The pizza delivery giant saw stabilizing demand trends in its fiscal fourth-quarter earnings report that, paired with an aggressive store expansion rate, pushed global sales higher by 8%.

That top-line figure only tells a small part of the story, though, so let's take a closer look at the operating and financial highlights.

Friends sharing a pizza.

Image source: Getty Images.

Changing the trend

Comparable-store sales gains were 3.4% in the core U.S. segment, which marked the first time in seven quarters that Domino's didn't post a weaker result sequentially on that fundamental growth metric. Comps had peaked at over 8% in early 2018 but have decelerated in every subsequent quarter, bottoming out last quarter at 2.4%.

The pizza delivery giant also added 141 new locations in the mature U.S. market as part of its "fortressing" strategy that aims to protect market share at the expense of short-term comps. "I am extremely proud of the accomplishments of our franchisees," CEO Ritch Allison said in a press release.

The news wasn't as positive in Domino's international segment, where growth slowed again, falling to 1.7% for the quarter and 1.9% for full-year 2019. That was still good enough to mark the division's 104th consecutive quarter of gains.

Earnings and margins

The restaurant chain had plenty of good news for shareholders on the financial front. Operating margin inched up to 39% of sales from 38%, and operating income saw a similar uptick to 18% of sales. Earnings per share jumped 20%, thanks in part to aggressive stock repurchase spending by the management team.

Domino's reported $411 million in free cash flow for the year compared to $274 million in 2018. "Our relentless focus on our customers, our franchisees, and the long-term growth and profitability of the business model helped us deliver a solid 2019 in the face of unique competitive headwinds," Allison explained.

Looking ahead

Those headwinds are likely to persist in 2020 as more restaurant chains stampede into the home delivery niche. As a market leader in delivered fast food, Domino's stands to lose a lot from this competitive intrusion.

However, the chain's modest sales boost this quarter suggests that it might be able to navigate that challenge without sacrificing much in the way of market share or profitability. The sales boost also marks a key win for management's fortressing strategy, which has worked in a few international markets but hadn't shown concrete results in the U.S. segment before this past quarter.

Domino's still faces major challenges in preserving its position in home delivery in 2020. But the encouraging end to 2019 means the business has momentum on its side, plus plenty of competitive assets that it can deploy to push its advantage going forward.

To that end, the company affirmed its recently downgraded long-term outlook that calls for U.S. comps of between 2% and 5% and international gains ranging from 1% to 4%. This report suggests the high end of that U.S. range is still possible in 2020.

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