Why Domino’s Could Report Higher Same-Store Sales Growth
Domino's Upcoming 3Q15 Earnings: What Can We Expect?
Same-store sales growth
About 93% of Domino’s (DPZ) revenue, which includes revenue from the domestic distribution segment and domestic stores, comes from the United States. Revenue in a restaurant business is driven by same-store sales growth and unit growth. Domestically, Domino’s is adding units at about 1.7% annually, which is slow compared to the 11% unit growth rate in international markets. So same-store sales growth is the key to Domino’s revenue growth, which investors should closely monitor.
Higher same-store sales growth
In a pre-earning business update released on September 28, Domino’s stated that 3Q15 same-store sales growth increased to 10.5% for domestic stores compared to 7.7% in the corresponding quarter a year ago in 2014.
Same-store sales growth for international stores increased slightly to 7.7% compared to 7.1% in the corresponding quarter a year ago.
Macro effects
Stronger US economic conditions may be the reason for this growth. Domino’s CEO Patrick Doyle stated in the company’s 1Q15 earnings call that “improvements in job growth and employment” in the United States “correlates to more pizza orders.”
The unemployment rate is at its lowest with the latest reading of 5.1%, as you can see in the chart above.
Domino’s same-store sales growth has also trended with the US food and drinking place retail trade historically.
The food and drinking place retail trade, on a three-month rolling basis in August 2015, stands higher, at 8.5% compared to 7.2% a year ago.
This increased optimism may explain why Domino’s is trading higher this year compared to the previous year. We’ll publish a post-earning analysis on Domino’s, so mark your calendar to visit Market Realist after the earnings report!
Improvements in the food and drinking place retail trade are also positive for other restaurant companies, such as Papa John’s (PZZA), Chipotle (CMG), and Panera (PNRA) as well as the Consumer Discretionary Select Sector SPDR (XLY). Restaurants such as these make up to about 10% of XLY’s portfolio.
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