Domino's (DPZ -1.68%) recently reported low single-digit sales growth and falling earnings for the fiscal second quarter, which runs through late June. And yet the pizza delivery leader's stock hit a new high following that report.
The share surge reflects the fact that Domino's second-quarter momentum held up even when compared to a year ago, when demand was soaring during the initial phases of the pandemic. And CEO Ritch Allison and his team are as bullish as ever about the chain's potential to dramatically expand its sales base over time.
Let's look at a few of their comments from the recent call with investors that show why Domino's is still an attractive stock despite its rally over the past year.
Image source: Getty Images.
1. Still playing offense
"The pace of net store growth has accelerated significantly during the first half of this year," Allison said.
Domino's roughly 3% sales uptick in the U.S. market might seem sluggish at first glance. But it was actually a big growth win considering revenue soared 16% in the year-ago period. The chain this spring was able to hold its volumes steady compared to that spiking period, while prices and delivery fees crept higher.
But investors should be just as impressed with Domino's store expansion. The company has opened 884 new locations over the past 12 months, compared to 624 in the full 2020 fiscal year. That growth is a testament to Domino's efficient sales model that relies almost entirely on delivery and take-out processing. Its franchisees are enjoying the ride, too, as cash flow and profit margin keep rising.
2. There's no need for promotions
"We once again elected not to run any of our aggressive ... promotions, but instead remain focused on providing great service and offering great value to our customers every day," Allison said.
Strong demand across most metropolitan areas made it easy for Domino's to scale back on its normal weekly promotions. That strategy, plus rising prices, allowed gross profitability to race toward 40% of sales despite soaring food costs. Domino's leadership position in the industry also means that it is more profitable than peers like Papa John's (PZZA 1.87%).
DPZ operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Investors can reasonably expect margins to keep improving, with help from lower interest rates on debt, higher delivery fees, and a growing sales base.
3. The drive-thru opportunity is huge
"Our franchisees and operators have fully embraced car-side delivery, and we are consistently averaging below two minutes out the door and on our way to the customers' cars," Allison said.
One big worry about Domino's business has been that restaurant and fast-food chains will etch into its market share as they pour resources into home delivery. But there's no sign of this happening today.
Domino's might have a chance at winning share from takeaway giants like McDonald's, in fact. The company's new car-side pickup service has been a quick hit with people seeking a more convenient blend between delivery and carryout. It allows Domino's to get a step closer to the type of drive-thru service that's lifting sales at places like Chipotle and Shake Shack.
It's those kinds of innovations that have allowed Domino's to steadily grow market share in the intensely competitive fast-food industry over the last decade. Investors should benefit from continued wins in this arena well beyond 2021, too.
