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Domino's Isn't Lying About its Improved Pizza Quality

By Steve Symington - Oct 19, 2014 at 8:40AM

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Domino's may have reinvented its pizza almost five years ago. But that move is still paying today

Domino's just posted its best same-store sales increase since 2009. Credit: Domino's Pizza

When Domino's Pizza (DPZ 2.01%) admitted five years ago that its flagship pies were sub-par, one could argue that it turned out to be the best move the chain had ever made.

But at the time it seemed almost desperate: Delivery sales had fallen 6% through October of that year, and a 2009 survey of consumer taste preferences among national chains had just placed Domino's in a two-way tie for last place with Chuck E. Cheese's. As a result, Domino's not only completely overhauled its core pizza recipe -- which was a massive risk in itself -- but also proceeded to publicly admit its failings to consumers via a widespread marketing campaign.

That message continues to resonate with diners today. And now, thanks to a combination of that extended campaign, improved pizza quality, and an astute embrace of technology to bolster its brand, Domino's stands atop all other U.S. pizza chains in terms of consumer loyalty.

14 quarters and counting...
Perhaps it should come as no surprise, then, that Domino's just capped its 14th consecutive quarter of domestic same-store sales growth. Specifically, earlier this week, Domino's announced third-quarter comps grew 7.7% over the same year-ago period. According to Domino's CEO J. Patrick Doyle, "It's the best quarter of comps we've had since the relaunch."

If you're wondering just how long Domino's might be able to keep up its stateside strength, note that Domino's international division simultaneously posted a 7.1% increase in comps, marking an astounding 83 consecutive quarters of international same-store sales growth. Domino's also ended the quarter with 160 more locations than it started, with the majority coming from its international segment.

When all was said and done, third-quarter revenue climbed 10.5% year-over-year to $446.6 million, which translated to a 16.3% increase in net income to $35.6 million. Better yet, it also increased investors' slice of the pie by spending around $17.4 million to repurchase 242,700 shares of common stock. As a result, net income per diluted share grew 23.5% to $0.63.

Competition isn't letting up
But it's also worth noting that Domino's isn't the only pizza joint seeing strong results.

In fact, Papa Murphy's (FRSH) marked its own 14th consecutive quarter of comparable-store sales growth last quarter -- albeit at a much leaner 1.5% pace, including 5.7% at company-owned locations, and 1.2% at its more substantial franchised store base. For the full year, Papa Murphy's only expects comps growth to come in around 2%.

And while Papa John's (PZZA 3.12%) isn't due to report third-quarter results until next month, last quarter it saw revenue jump 9.1% year-over-year to $380.9 million, thanks to systemwide comparable sales increases of 6% and 8.6%, respectively, at North American and international locations. Papa John's also increased its comps guidance for the year to 4% to 6% for North America, and 6% to 8% internationally.

On the other hand -- and perhaps most significantly -- Yum! Brands' (YUM 0.38%) massive Pizza Hut chain saw third-quarter division system sales stay relatively even, as unit growth was offset by a 1% same-store sale decline. And that's not including Pizza Hut in China, where same-store sales plunged 11%, mostly due to the fallout of bad publicity surrounding a now-former supplier in the region. To Yum!'s credit, however, the supplier issue was largely out of its control. And one executive recently told me Pizza Hut is expected to enjoy a "strong 2015," as they're already seeing signs of an early rebound amid their own marketing push for product innovation and value for Pizza Hut outside of China.

Can Domino's dominance continue?
But with that in mind, I find myself all that much more impressed both by Domino's consistency, and by its accelerating same-store sales performance over the past several years. It's no wonder, then, that while the rest of the stock market has pulled back sharply over the past month, Domino's Pizza shares just touched a fresh all-time high as I write this article.

In the end, if Domino's can keep up the good work from here, that won't be the last all-time high investors see.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
$412.24 (2.01%) $8.11
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
$118.16 (0.38%) $0.45
Papa John's International, Inc. Stock Quote
Papa John's International, Inc.
$92.89 (3.12%) $2.81
Papa Murphy's Holdings, Inc. Stock Quote
Papa Murphy's Holdings, Inc.

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