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Tech titan? Domino's sales boosted by 'tech-to-table' approach

Signage at a Domino's pizza restaurant is pictured in Burbank, California October 16, 2012. REUTERS/Fred Prouser

Despite a shortfall on earnings per share, Domino's (DPZ) had such a strong quarter of sales, helped by its implementation of new technologies, that Wall Street traders were indicating the profit miss wasn't worth spending much time worrying about.

The Ann Arbor, Mich.-based pizza maker, trailing only Pizza Hut in terms of store count, said Tuesday that overall revenue growth was much better than analysts had anticipated in the fourth quarter, while same-store sales climbed around the world.

With all that considered, the stock, which has been trading at record levels, was lower by 1.1% to $103.31 recently. But to put that in perspective, it's not an especially significant step down since Domino's shares had a compound annual growth rate of 65% from the close of 2008 to the end of 2014. And because that rally has also elevated its valuation measures to five-year highs, were there a panic about profits it likely would have led to a more substantial decline.

Still, earnings clearly weren't ideal. Domino's posted an adjusted profit of 91 cents a share in the quarter. That climbed from 78 cents in the same three months last year, though analysts had a forecast of 93 cents. Sales didn't have that issue, and that worked to mitigate the earnings result. On the domestic side same-store sales, an indicator of both customer visits and spending, rose 11.1% in the quarter, significantly surpassing the 6.7% estimate. An increase in the number of orders, not higher checkout prices, was the majority factor in the gain, company management said. For the international business, same-store sales were up 6.1% in the quarter.

Most of Domino's new stores are opening outside the U.S., with last year seeing 662 net new international stores among the 743 total.

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Revenue of $643 million was above the $616.2 million outlook. Domino's, whose system is 97%-franchised, gets revenue primarily from supply chain sales, with the rest from company-owned stores and franchise-related payments. In the most recent quarter, supply-chain revenue totaled $410.8 million. Higher commodity prices, including cheese, combined with greater equipment sales to franchisees, many of which are remodeling stores, to prop up revenue. The entire Domino's system, 11,629 stores as of Dec. 28, had almost $9 billion in sales last year.

Domino's has been on the ascent, with its share price and sales, because of recipe changes that have brought in new customers and the type of digital technology that restaurant brands are hoping will make them stand out in a gadget-reliant society. The largest pizza sellers have made tech a heavy component of their operations, and Domino's, as well as Papa John's (PZZA), which reports earnings after the close Tuesday, now are getting around half of their U.S. sales from the Web and apps. Pizza Hut is similarly reliant on digital ordering at its stores. Domino's voice-ordering option is part of this, with about half a million orders so far in its first few months.

CEO Patrick Doyle said on a conference call after the earnings were reported that "we're definitely thinking and acting like an e-commerce company," guided by a "tech-to-table" philosophy -- an approach that works for the modern diner who has stopped dialing phone numbers. Domino's does still get about 40% of its orders from the phone, but with technology developing as it is, that almost certainly will decrease over time.

Meanwhile, Domino's is also benefiting from store updates that are part of the corporate makeover, and about 1,000 more remodels are set for 2015. It's planning to add to its location count by 5% to 7% this year, meaning it would build as many as 814 new stores.