Domino's Pizza (DPZ 0.27%) has been one of the unintended beneficiaries of the coronavirus pandemic. Governments worldwide implemented various business restrictions in response to the outbreak, including asking restaurants to be closed to in-person diners. This created a surge in demand for ordering food for delivery.
Domino's has benefited as a result -- and interestingly, folks have kept ordering pizza despite a gradual economic reopening. All this good news helped Domino's stock to soar as high as $567 per share last year. And now, recent concerns about inflation and labor shortages have sent it back down to $469. Can the stock reach $500 again in 2022?
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Its franchise model has allowed it to expand quickly
Domino's success did not start at the pandemic's onset. The company has grown revenue at a compound annual rate of 10% in the past decade. Domino's runs on a franchise business model; franchisees own 98% of its locations.
The franchise business model allows Domino's to grow revenue and profits without significant capital investments. Otherwise, it may not have been possible for Domino's to grow to 18,380 locations worldwide. It also reduces the need for management resources as franchisees are in charge of their store's operations. Domino's takes an up-front fee and a percentage of its franchisees' sales.
So while revenue has increased at a compound rate of 10% in the past decade, earnings per share have grown at a much faster 23.9% rate. Such is the power of Domino's business model and operational excellence. Knowing all this, it's no surprise then that Domino's stock is up nearly 1,500% in that time.
Domino's must tame inflationary pressure
At a share price of $469, Domino's is only about 6% away from $500. That's not a bridge too far to cross in 2022. And now that the shares have fallen back down, they are also more reasonably valued, trading at a price-to-earnings ratio of 36 and price-to-free cash flow of 29 -- perhaps not inexpensive, but well off their highs.
However, management noted that costs are soaring for the quick-service pizza giant. The company is paying more for everything, from employees to ingredients to machinery. Domino's estimates that food costs alone will rise 8% to 10% compared to 2021.
Moreover, even though businesses are paying higher wages, they find it difficult to staff their locations sufficiently. Fewer folks are willing to work while a potentially deadly virus is still in circulation; an extra $1 or $2 per hour is not motivating workers to apply. Domino's aims for 6% to 8% in new store openings each year. With difficulty staffing locations, it may fall below that benchmark in 2022.
These rising costs and labor shortages could take a bite out of profits and cause investors to lose enthusiasm. Already, Domino's stock has fallen nearly 17% year to date in 2022. If Domino's is to surpass $500 per share again, it will likely have to prove to the market that inflationary pressure will not reduce profits significantly or cause new-store growth to fall substantially below its targeted range. If it can do that, it has a realistic chance of passing $500 per share in 2022.
