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The Biggest Problem with Domino's Pizza, Inc. Stock

By Daniel B. Kline - Mar 22, 2016 at 9:20AM

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The company had a great year and its stock benefited, but there could be problems ahead.

Domino's Pizza (DPZ -0.40%) has sold an awful lot of its not-very good pizza.

Maybe it's price, maybe it's convenience, or maybe there are just parts of the country (and world) where barely passable pies draw a huge audience. Whatever the reason Domino's has been on a tear, posting impressive Q4 as well as full-year results.

Those positive numbers caused the company's stock to jump from a close of $117.61 on Feb. 24 to $132.90 on Feb. 25, after it reported results -- a 13% jump. Shares have traded in that range in the weeks since suggesting that the bump may not be a short-term spike due to good numbers.

But, just because Domino's had a good year and the market rewarded those results does not mean that the company has clear sailing ahead. It's very possible that the conditions which helped its rise could change, sending shares moving back in the wrong direction

As you can see above, shares jumped when Q4 and full-year earnings were reported in February. Source:

How well did Domino's do?
The company, which famously rebooted its pizza in 2010 (making it OK instead of awful), had a very good fourth quarter and full year in 2015.

Domestic same store sales grew 10.7% in Q4 versus the same period a year-ago and 12.% for the full year. Internationally the pizza chain also posted strong results, with same store sales growth of 8.6% during the quarter and 7.8% for the full year marking the 88th consecutive quarter and 22nd full year of positive international same store sales growth. 

On an as-reported basis, fourth quarter diluted EPS was $1.18, up 38.8% over the Q4, 2014. Full year diluted EPS was $3.47, up 21.3% over the prior year. EPS as reported was however negatively affected by expenses related to the company's recapitalization, which was completed during the fourth quarter, and was positively affected by the inclusion of a 53rd week in Q4, 2015. So, reflecting those adjustments Q4 diluted EPS was $1.15, up 26.4% over the prior-year quarter and full year adjusted diluted EPS was $3.45, a 19% gain year over year.

"Our network of strong franchisees has become even more profitable during these years of continued positive same store sales growth," said CEO J. Patrick Doyle in the earnings release. "Great store economics around the world have led to accelerated unit growth. It's a positive cycle and the momentum continued through 2015."

What could hurt Domino's?
So far no company has scored nationally or internationally with a fast-casual (as opposed to Domino's being fast food) pizza concept. Yum! Brands (YUM 1.86%) tried to launch a menu aimed at the users captivated by the wealth of options offered at fast casual leaders including Chipotle (CMG 3.06%) and Panera Bread, but it largely failed.

Dubbed "Flavor of Now," the Pizza Hut offering looked to take pizza more upscale with fancier toppings and more sophisticated flavors. That seemed like a good idea, but it was not something customers were looking for at Pizza Hut and it did not increase sales, Fox News reported.

But, just because more upscale Millennial-friendly pizza did not work for Pizza Hut does not mean it will not work for a brand with better positioning. That happening -- someone creating a well-priced higher-end national or international pizza offering with higher perceived quality -- could take Domino's down.

It could happen
The rise of Chipotle clearly hurt other fast-food chains (including Yum!'s Taco Bell) as well as the leading low-end burger purveyors. National delivery chains including Domino's appeared to be mostly immune from the Chipotle effect perhaps because delivery pizza is not analogous to other fast food. But, Chipotle proved that consumers would pay more for a better product leaving Domino's potentially vulnerable to a higher-end, higher-priced, but still affordable pizza chain.

Of course, being the Chipotle of pizza is a prize that a lot of companies are pursuing, but none has actually achieved. Still, local and regional players including Blaze Pizza, Uncle Maddio's Pizza Joint, and Pie Five, among a number of others led by industry veterans are trying to make it happen.

"It happened before in the better-burger category, it happened in the better-sandwich category, [and] the better-coffee category when Starbucks came on the scene," Uncle Maddio's Andrew told QSR Magazine. "Being in the better-pizza category and being the trailblazer in the better-pizza category is a very appealing proposition."

If one of these companies breaks through it could hurt Domino's appeal because being cheap, convenient, and readily available proved to be not enough in other fast food segments when the right fast casual competitors came along.

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Stocks Mentioned

Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
$396.54 (-0.40%) $-1.59
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,329.02 (3.06%) $39.50
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
$114.42 (1.86%) $2.09
Panera Bread Company Stock Quote
Panera Bread Company

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