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Domino's (DPZ) Banks on Expansion Efforts Amid High Debt Woes

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Shares of Domino's Pizza, Inc. DPZ are riding high on expansion efforts, impressive margin growth, solid digital ordering system and rising global retail sales. In the past six months, the company’s shares have gained 24.1%, compared with the industry’s rally of 4.5%. However, coronavirus pandemic related woes and high debt remain concerns. Let’s delve deeper.

Key Catalysts

Since Domino’s generates a chunk of its revenues from outside the United States, the company remains committed to accelerating presence in high-growth international markets to boost business. The company inaugurated 238 (35 net U.S. stores and 203 net international stores) net stores globally during second-quarter fiscal 2021.

Second-quarter fiscal 2021 marked the 110th consecutive quarter of positive same-store sales in its international business. Improvement in comps can be attributed to ticket growth. This was driven by the return of non-delivery service methods, resumption of normal store hours and reopening of international stores (that were closed in the prior-year quarter).

The Zacks Rank #3 (Hold) company continues to impress investors with robust margin growth. In second-quarter fiscal 2021, the company’s operating margin expanded 70 basis points (bps) year over year to 39.5%. Operating margin expansion was primarily driven by an increase in revenues in its U.S. franchise business. The company-owned store margin (as a percentage of revenues) increased to 24.5% compared with 23.1% in the prior-year quarter. The improvement was driven by lower labor costs, partially offset by rise in food costs.

Domino’s is investing heavily in technology-driven initiatives like digital ordering to boost sales. The company continues to witness growth in terms of its carryout and delivery businesses. Also, it has been emphasizing on Car Side Delivery 2-Minute Guarantee with awareness campaigns. With less than 2 minutes of wait time, the technology has been embraced by its franchisees and operators. Further developments in this regard are likely, it intends to boost drive-through oriented customer experience.

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Concerns

At the end of second-quarter 2021, fewer than 175 stores (majority located in India) were temporarily shut due to the pandemic. The company announced that the coronavirus pandemic will continue to hurt international markets for some time. Due to the uncertain and dynamic nature of the crisis, the company continues to regularly monitor the pandemic, so as to operate and survive amid such trying times.

Managing liquidity has become a herculean task amid the coronavirus pandemic. Long-term debt as of Jun 20, 2021 was $5 billion compared with $4.1 billion as of Mar 28, 2021. The company ended the fiscal second quarter with cash and cash equivalent of $292.1 million compared with $267.7 million in the previous quarter. Although cash and cash equivalents have increased sequentially, it might still be difficult to manage high debt levels. Meanwhile, debt to capitalisation during the quarter was 540% compared with 466.2% in the previous quarter.

Key Picks

Some better-ranked stocks in the same space are McDonald's Corporation MCD, Chipotle Mexican Grill, Inc. CMG and Jack in the Box Inc. JACK, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

McDonald's has a three-five year earnings per share growth rate of 11.7%.

Chipotle's 2021 earnings are expected to rise 137.3%.

Jack in the Box has a trailing four-quarter earnings surprise of 26.4%, on average.


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