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How Domino's Managed to Generate $1 Million in Free Cash Flow per Day in 2019

By Demitri Kalogeropoulos - Feb 24, 2020 at 3:59PM

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The pizza giant just ended its fiscal year on a positive note.

Domino's (DPZ 2.01%) surprised investors last week by posting accelerating sales growth at the close of fiscal 2019. The rebound came despite a surge of new competition in the fast-food delivery space, and that success sent the stock soaring.

In a conference call with investors, CEO Richard Allison and his team discussed why they're optimistic that they can build on that positive momentum even as restaurant chains and third-party aggregators continue trying to steal its market share. Let's look at some highlights.

Friends sharing a pizza.

Image source: Getty Images.

Performing well in a tough environment

Our delivery [volume] was positive in Q4 and up sequentially over Q3, demonstrating resilience in the highly competitive food delivery marketplaces.
-- CFO Jeffrey Lawrence

Comparable-store sales in the core U.S. market accelerated for the first time in over a year, rising to over 3% from 2.4% in the third quarter. Management noted that this rebound occurred despite what they described as an "unprecedented" flood of competitive activity in the restaurant delivery space. Many of these chains and third-party aggregators, Domino's believes, are operating at unsustainably low profitability in hopes of establishing market share.

Yet the pizza giant successfully defended its prime position. "The Domino's system really shined through," Allison said, "as we continue to grow at a faster pace than the restaurant industry and take meaningful share within our pizza category."

Attractive economics

During 2019 we generated ... free cash flow of $411 million, which was a 50% increase over 2018. On average, that is more than $1 million in free cash flow generated per day, which we believe demonstrates our outstanding financial model and performance.
-- Lawrence

Domino's franchisees dealt with plenty of cost challenges, including rising labor and food expenses and higher rent. Still, the restaurant chain's huge volumes and small, efficient store layout kept economic returns among the highest in the industry. Overall cash flow surged to $411 million from $274 million a year earlier.

An even better indication of its financial strength, management says, is the fact that fewer than 100 locations have been closed in the U.S. over the past five years -- out of a total of more than 6,000 today. Just five Domino's restaurants were closed last quarter, with 141 additions in the period.

Looking ahead

We're ramping up our focus on service in 2020. Getting our pizzas to our customers hotter, fresher, and more consistently than ever before. Fortressing will help us to position the business for success through tighter delivery zones, but that's only part of the battle.
-- Allison

Domino's 2020 outlook implies a busy year of investments across areas like tech innovation, employee training, and the supply chain. The company plans to step up its store launch pace to aid in protecting its established grip on many metropolitan neighborhoods. Each of these initiatives should support long-term growth without sacrificing too much in the way of profits.

The recent sales growth uptick wasn't enough to convince executives to lift their medium-term outlook that predicts a significant comps slowdown from the high-single-digit range investors saw in 2018. Yet there might be a light at the end of the tunnel in terms of competitive intrusions. Third-party aggregator pressure "appeared to level off" last quarter, suggesting the market shakeout might already be starting.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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