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Domino's (DPZ) Benefits From Robust Comps Growth, Debts High

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Domino's Pizza, Inc. DPZ is poised to benefit from its international expansion efforts, robust comps growth, strong digital ordering system and remodeling efforts. However, coronavirus-related woes along with high debt levels are headwinds.

Let’s discuss the factors highlighting why investors should hold on to the stock for the time being.

Factors Driving Growth

Since Domino’s generates a chunk of revenues from outside the United States, it is committed to accelerating presence in high-growth international markets to boost business. The company’s international growth continues to be strong and diversified across markets, courtesy of exceptional unit level economics.

Notably, the third quarter of 2020 marked the 107th consecutive quarter of positive same-store sales in the company’s international business. Improvement in comps can be attributed to ticket growth. The company inaugurated 83 (44 net U.S. stores and 39 net new international stores) global net store openings during third-quarter 2020.

Apart from established markets like China, Japan and Germany have been seeing solid growth. Meanwhile, the company is working diligently to revive its operations in India and Spain through store re-openings.

Domino’s that shares space with Brinker International, Inc. EAT, Red Robin Gourmet Burgers, Inc. RRGB and Jack in the Box Inc. JACK in the Zacks Retail - Restaurants industry,  continues to focus on various sales-building initiatives to stay afloat during the pandemic. Notably, the company is investing heavily in technology-driven initiatives like digital ordering to boost sales. It started driverless pizza delivery services in Houston, TX. To this end, the company partnered with Nuro — a robotic company — for the delivery services. Moreover, other digital enhancements in terms of ordering, selecting service methods, paying and tipping were implemented to enhance consumers’ experience. Also, the company’s digital loyalty program — Piece of the Pie Rewards — continues to contribute significantly to traffic.

Meanwhile, the company’s remodeling efforts have gained momentum leading to sales improvement in the past few quarters. The company is on track to convert all of its restaurants to the “Pizza Theater” prototype, which offers a comfy lobby, open-area viewing of the food preparation process and the ability to track carryout orders electronically on a lobby screen. Domino’s remodeling initiative is thus anticipated to continue enhancing its potential as a brand and augment guest experience. Notably, the company continues to innovate aggressively across all aspects of its business — including GPS, e-bikes, AI in-store technology, great food, and an evolving digital experience.

Concerns

Maintaining liquidity has become a herculean task for most companies in the current scenario. Coming to the balance sheet, the company’s long-term debt, as of Sep 6, 2020, stood at approximately $4.1 billion (almost flat sequentially). During the fiscal third quarter, debt-to-capitalization came in at 459.1% compared with 469.4% at the end of Jun 14, 2020. Moreover, the company ended third-quarter fiscal 2020 with cash and cash equivalent of $330.7 million, which may not be enough to manage the high debt level.

Moreover, the pandemic impacted the company’s business. Owing 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.

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