What to Watch When Domino's Reports Earnings

Domino's (DPZ -1.11%) investors may be in for a volatile trading period as the company is announcing third-quarter earnings on Oct. 14. 

In this Backstage Pass video, which aired Sept. 23, 2021, Motley Fool contributor Demitri Kalogeropoulos talks with Motley Fool contributors Trevor Jennewine and Brian Withers to preview that announcement and explain why the stock looks primed to outpace the market from here.

Brian Withers: Let's talk about pizza. [laughs]

Trevor Jennewine: Sounds good.

Demitri Kalogeropoulos: Domino's Pizza. This is just a really interesting story. There are going to be reporting earnings on the 14th, which is DPZ. I have been following the stock for a while. It's interesting. You would think that pizza wouldn't be a really easy place to get some good investor returns, but Domino's has just been amazing. There are so many competitors, national competitors, local competitors, every restaurant sales the product, that's not necessarily a product you can make very different than anything else. It's just simple ingredients basically. But Domino's has been steadily increasing its market share for over a decade here, and that has rewarded investors a lot.

We're expecting the company to report another quarter of growth. It's been growing in the US market for over 40 quarters, 10 consecutive years there. That's a nice growth spike and it's going to continue. It has been growing over the last six months even after compared to the 2020 surge.

But people are expecting the sales to go up about 8% to a little bit over one billion and earnings are supposed to jump a little bit more by 25%. Domino's has been getting more profitable, and that'll be interesting to see if that will continue with all these prices going up. But one big number I'll be watching is store growth.

Domino's has what they call a fortressing strategy where they add competitive stores, even in the neighborhood where they already have almost a lock on the market. It's an interesting way to do that. The objective there is to keep competitors out, and basically raise the quality of service across all the stores. Instead of waiting nine minutes for pizza, you can get one in eight or maybe seven. That's a meaningful improvement and their data suggest that it's working.

They have a lot of room that they've got something like 18,000 locations across the world right now up from about 16,000 just a few years ago. They've also accelerated the store growth. Just in the past year, they've opened to over 800 locations in the past 12 months compared to about 600 in all of 2020.

That's a big push by management, and then of course, when we were watching the pricing power there, they're going to be raising prices. I'd expect margins to go up because of that. I would expect them to be able to offset all the extra costs that they're incurring, including higher wages and things like that. Then the big market share battle is drive-through.

Domino's is getting to that market, pizza isn't the thing you can make in two minutes like assembling a burger or something like that. But they're getting closer with this mobile ordering to just allow people to sit in the parking lot. You can make an order and then the time, it would take you to get to the local restaurants. You could have it with a couple of minutes wait, and that's an interesting growth avenue.

The stock price, as you can see here, it jumped right after the quarterly earnings last go, and it was really good news and you can see it all just petered out over the last three months. I'm not sure why that is.

Like I said, that report was almost all good news for investors. This might be an opportunity for Domino's stock to start climbing back up again if it's got some good news for investors.

Withers: I find Domino's really fascinating company and definitely one that's been playing to its digital strength. I think it was one of the first companies that offered a status if you ordered online, it would progress your pizza through the stages and let you know what was going on and text you when it was ready and things like that. Their stores, I remember the store that I used to visit in New Jersey, there'd be like no way they could add a drive-through to it.

I think this digital approach to, "Hey, I'm here and you bring your pizza out in 90 seconds or whatever it is." I think is a really fascinating way to use the technology and really up their game for offsetting something that a lot of other restaurants should have built-in versus physical drive through, but you replacing that with a digital thing. I think it's obviously much more scalable and faster to roll out through your entire enterprise.

Kalogeropoulos: Totally, yeah. They build themselves as a tech leader too, which I think it's true. They spend a lot of resources and a lot of time trying to push the envelope tech-wise in the pizza industry. They've got those robots, they were one of the first to do automated delivery things.

They did maybe two years ago they launched that. I think they call it hotspot service, where you can get pizza delivered to thousands of places that aren't actual addresses. If you're sitting on the beach or if you're at a park or something like that, they've got these little spots close to you. You can be using geolocation or whatever you can find your way to pick up point. It doesn't have to be an address at a house, and that's cool part to watch of the story too.

Withers: Yeah. Was it Domino's that offered to let the town know about potholes and helped fill them in. Was that them?

Kalogeropoulos: I think it was. Yeah. [laughs]

Withers: That's absolutely crazy. Trevor, are you Domino's customer?

Jennewine: I have not eaten at Domino's in a long time though. I have wished I was a shareholder for many years though. I'm still not, but definitely a good company.

Withers: Awesome.