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The U.S. quick-service pizza space is growing by leaps and bounds. Overshadowing independent restaurants, the pizza bigwigs are continuously strategizing to attract customers. Per The Statistics Portal report, the United States sees approximately $33 billion of consumer spending in the quick-service pizza category every year. Out of the total, roughly $15 billion constitutes take-out pizza services, followed by pizza delivery of around $10 billion.
Notably, per unit sales for chain pizzerias are nearly 70% higher than that of independent restaurants. According to Euromonitor, pizza chains saw 5.8% growth in 2017, while independent restaurants recorded a 2.7% sales rise.
The PMQ Pizza Magazine estimates a total of $45.1 billion sales in 2018, out of which $26.6 billion will come from the top 50 chains in the country. Independent restaurants are likely to rake in around $18.5 billion.
What Do Consumers Expect From Pizzerias?
To keep pace with the changing dynamics of the space, pizza chains are continuously investing in digital capabilities. Per a recent study by Consumer Reports, spending on dining-out has increased nominally, with demand for high-quality food with easier accessibility. Incorporation of better technologies has been a key sales-driving strategy of large pizza chains in the United States.
Consumers are not only particular about the quality and taste of food but also demand efficient and prompt services. They are also conscious about the affordability factor.
Thus, even with advanced digital facilities and great delivery systems, expensive pizza chains might fail to draw customers. Thus, in order to boost sales, leading U.S. pizza giants like Domino’s, Papa John’s and Pizza Hut focus on providing efficient service through digital facilities. They are also trying to keep prices low.
How Are Pizza Giants Strategizing?
Domino's Pizza, Inc. DPZ is one of the world’s largest fast-food chains, with more than 14,800 stores in over 85 international markets.
The company recently reaffirmed its three-to-five-year outlook, which hints at global retail sales growth between 8% and 12%, and domestic and international comps growth of 3% and 6%, respectively.
In order to drive traffic and in turn revenues, this pizza giant has been ramping up investments in technology-driven initiatives like digital ordering. In 2017, the company’s AnyWare suite of ordering platforms that allow customers to order through apps such as Google Home, Facebook FB Messenger, Amazon Echo, Twitter and via a Pizza emoji on text, grew significantly. The company is also committed toward maintaining investments and its lead in the digital arena, which should boost sales apart from enhancing its competitive position.
In order to drive earnings, the company is focusing on refranchising which minimizes capital requirement and boosts shareholders’ return. For 2018, the Zacks Consensus Estimate for Domino’s earnings shows an impressive year-over-year growth of 48.5%. The company is also expected to see earnings grow at an annualized rate of 15.2% over the next three-to-five years.
Meanwhile, in six months’ time, Domino’s shares have rallied 19.9%, outperforming 5.2% gain of the industry it belongs to. Investors should also note that the company carries a Zacks Rank #3 (Hold) and boasts an A grade for Growth as per our Style Scores system. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Domino’s is also expected to become the leading pizza company on digital advancement, overtaking Pizza Hut, which operates under Yum! Brands YUM. Carrying a Zacks Rank #3, Yum! Brands is also trying to keep up with Domino’s with respect to digital initiatives.
Recently, Pizza Hut collaborated with Toyota to facilitate delivery via driverless vehicles. Also, the company announced a partnership with online food delivery platform, Grubhub, to drive online sales and delivery from restaurants.
Additionally, the company is working toward a cost-efficient business structure. Management expects to cut capex to about $100 million by 2019, increase free cash flow conversion to 100% and reduce general and administrative (G&A) expenditure by around $300 million (or 1.7% of system sales). In addition, the company aims to maintain an optimized capital structure with leverage of five times EBITDA. Over the next three years, it is committed to return an additional $6.5-$7 billion to shareholders through share repurchases and dividends.
Subsequently, the consensus estimate shows earnings growth of 10.8% and 17.2% in 2018 and 2019, respectively. Also, the company’s shares have gained 6.8% in the past six months, outperforming the industry.
Notably, Pizza Hut had overthrown Papa John’s International, Inc. PZZA as the official pizza sponsor of the NFL.
Meanwhile, Papa John’s is grappling with high costs and declining sales. The company’s shares have lost 13% in the past six months, the growth of its industry. Considering this, earnings estimates for 2018 have been revised 3.8% downward over the past 30 days, reflecting analysts’ concern. The consensus estimate also hints at 1.2% year-over-year decline in 2018 earnings.
However, to safeguard its industry-leading position, Papa John’s aims to redesign its digital platform and digital solutions capabilities, leveraging on enhanced data analytics. The company carries a Zacks Rank #4 (Sell).
Even though all pizza bigwigs are continuously vying for market traction, we believe Domino’s enjoys an edge in the space buoyed by its sales-building efforts, digital innovation, cost management and stellar earnings growth expectation.
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