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Domino's (DPZ) Strategic Efforts Bode Well: Should You Hold?

Zacks Equity Research

Domino's Pizza, Inc.’s DPZ positive same-store sales domestically and internationally, solid brand positioning, increased store count and focus on re-imaging bode well. However, investors are concerned regarding higher costs, negative currency translation and lower-than-expected fourth-quarter 2018 results. The stock has gained nearly 9% in a year’s time. However, the company’s shares have declined 1% year to-date, compared with the industry’s growth of 8.1%. Let’s delve deeper.

Key Catalysts

Since Domino’s generates a chunk of its revenues outside the United States, the company remains committed to accelerating presence in high-growth international markets to boost business. Meanwhile, the company’s international growth continues to be strong and diversified across markets, driven by exceptional unit level economics. Notably, the fourth quarter of 2018 marked the 100th consecutive quarter of positive same-store sales in its international business. Domino’s inaugurated 829 net new stores in international markets in 2017 and 1,058 net new stores in 2018.

Domino’s is investing heavily in technology-driven initiatives like digital ordering to boost sales. In 2017, the company’s AnyWare suite of ordering platforms that enable customers to order from various ordering apps and platforms — Google Home, Facebook Messenger, Apple Watch, Amazon Echo, Twitter and via a Pizza emoji on text — grew significantly. Meanwhile, its digital loyalty program — Piece of the Pie Rewards — continues to contribute significantly to traffic gains.

Meanwhile, the pizza category is a fast-growing segment in the U.S. quick-service restaurant industry and Domino’s is one of the largest pizza chains in the world. In the United States, the company is the market leader in the delivery segment and ranks second in the carry-out division. The fourth quarter of 2018 marked the 31st consecutive quarter of positive same-store-sales domestically.

Concerns

Domino's Pizza reported lower-than-expected fourth-quarter 2018 financial numbers. While earnings missed the Zacks Consensus Estimate after delivering a beat in each of the trailing three quarters, revenues lagged the same for the third straight quarter. Moreover, earnings estimate for the current year has also witnessed downward revision of 0.5% to $9.37.

Domino’s has considerable international presence and is therefore highly vulnerable to fluctuations in exchange rates. Strengthening of the dollar against certain currencies, including the British pound, is likely to impact the company’s results. In 2017 and 2018, foreign currency had a $1 million and $1.1 million negative impact on royalty revenues, respectively. The company expects foreign currency impact of $5 million to $10 million on royalty revenues in 2019.

Zacks Rank & Key Picks

Domino’s has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include Brinker International, Inc. EAT, Starbucks Corporation SBUX and Darden Restaurants, Inc. DRI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Brinker International current-year earnings are likely to grow by 10%.

Starbucks delivered average positive earnings surprise of 18.3% in the trailing four quarters.

Darden Restaurants reported better-than-expected earnings in three of the trailing four quarters, recording average positive earnings surprise of 4%.

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