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What Happens to Domino's After Restrictions Are Lifted?

By Lawrence Rothman, CFA – Aug 24, 2020 at 12:30PM

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Will Domino's delivery model continue to help results after a return to normalcy?

Domino's Pizza (DPZ 1.37%) has seen a boost in business due to the coronavirus pandemic. In the second quarter, U.S. same-store sales (comps) rose 16.1% and its diluted earnings per share under generally accepted accounting principles (GAAP) increased by 36.5% to $2.99. With its strong delivery model in place, this isn't surprising. The higher revenue and profit has resulted in the stock's standout performance, rising 40% this year.

As governments lift restrictions and people begin to leave home more often, can Domino's continue to do well?

A person in a mask and gloves presenting a couple of boxes with a credit card scanner on top.

Image source: Getty Images.

Strengthening position

This 60-year-old company produces the highest sales in the pizza space, competing against both mom-and-pop pizzerias and chains like Papa John's International.

This is a testament to its low prices and expanded menu offerings, including pasta, chicken, sandwiches, and desserts. You can see this in the results, which were doing well even before the pandemic struck. In 2019, Domino's U.S. comps rose 3.2%, and they were 1.9% higher internationally. After posting increases in the first two quarters of this year, Domino's streak of positive comps totaled 37 straight quarters in the U.S. and 106 quarters internationally. That proves it is not merely the customers staying at home who are increasing sales.

Higher sales are flowing to the bottom line, too. The company's 2019 adjusted diluted earnings per share grew nearly 14% to $9.57.

Management continues to tinker with the menu, including a recent launch of wings offered at a competitively priced $7.99. While this is too new to evaluate, management has focused on promoting the product. CEO Ritch Allison stated on the second-quarter earnings call that "Wings are a rapidly growing category... and as we're honest with ourselves our wings needed to improve." With the economy in a rough patch, I expect the low-priced offering to resonate with customers, providing it delivers on the promised higher quality.

Changing the menu items and pivoting quickly to a contact-free delivery system shows management's ability to adapt quickly. Better still for investors, there are still growth opportunities for this well-established company.

Expansion opportunities

This decades-old company is still opening new restaurants, adding over 1,100 last year. The company's growth plans hit a snag due to the pandemic, with only 84 new restaurants brought into the fold in the second quarter.

Over time, management expects to continue opening new restaurants at a faster clip. Given the company's sales and earnings growth, this is a good strategy. Opening new restaurants allows the company to better serve customers and deliver food quickly.

The only real issue is the stock's valuation. With a trailing price-to-earnings ratio of 37, the shares are not a bargain. While the price may bounce around in the short run, there's nothing wrong with paying up a bit to buy a strong company. So, if you have patience, Domino's Pizza stock should reward you.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Domino's Pizza. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Domino's Pizza Stock Quote
Domino's Pizza
DPZ
$335.13 (1.37%) $4.52
Papa Johns International Stock Quote
Papa Johns International
PZZA
$74.43 (-1.50%) $-1.13

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