Domino’s posts big earnings beat as sales surge

Yahoo Finance’s Brian Sozzi and Alexis Christoforous break down Domino’s earnings report, and what COVID-19 means for the restaurant industry with BTIG Managing Director Peter Saleh.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's talk a little pizza now because Domino's is one of the companies reporting today. They posted a big beat last quarter. Same store sales were up 16% here in the US. Peter Saleh covers Domino's and the restaurant space at BTIG. He is joining us now. Peter, good to see you again. So what should we make of this quarter at Domino's?

PETER SALEH: Good to see you as well. Thanks for having me on. Look, it was a great quarter, probably one of the best quarters they've had in maybe a decade. I think a lot of this is being driven by the stay-at-home trend, but that's not to say that they haven't been taking share. You can see that just from the stock performance. They've continuously, over the past 10, 12 years, driven positive same-store sales growth, positive unit growth. So they're taking a lot of share across the pizza space, and I think this quarter, it was just amplified by the stay-at-home trend with a 16% same-store sales growth number, which was just, you know, off the charts.

BRIAN SOZZI: Peter, what's the longer-term effect on Domino's but also Papa John's and other fast food delivery companies from bankruptcies, restaurant bankruptcies? Checkers is reportedly nearing a bankruptcy. They're starting to pile up in the space. And to your point, that's a major potential market share grab for some companies.

PETER SALEH: Yeah, I think you've been seeing, you know, Domino's and some of the quick service guys really taking share in this environment. If you have access-- more access to delivery or better at delivery, your sales have been extraordinarily well. And you saw that out of Papa John's. You're seeing it out of Domino's. You're seeing it out of some others, including Wingstop.

Sales are really, really strong, double-digit type comps. And they're taking share from these smaller operators who don't have a delivery platform and/or access through a drive-through. So you're seeing some of the smaller, weaker operators that don't have the access, you know, struggling, whereas the bigger guys are taking share.

But more importantly for Domino's, I think if you look at where they've been taking share. They've been taking share on value. And the real reason is their franchisees pay $0.25 per digital transaction. And as we all know, digital growth is where all the growth is happening these days. If you look at their peer group, which is essentially all the independent operators-- 50% of the pizza category is independent pizza operators-- those guys pay between $2 and $3 per digital transaction.

So that cost gap between the Domino's franchisee and the local operator of, you know, paying $2 to $3, that cost gap is being reinvested at Domino's back in the value. And they're winning, essentially, on price. So they're using their cost advantage to reinvest in value, winning on price, and they're taking share quarter in, quarter out, year in, year out.

ALEXIS CHRISTOFOROUS: That's a big price differential. I'm glad that you pointed that out, Peter. I know you recently raised your price target on Domino's to $440 a share. The stock is trading at around $413 a share. To your mind, is Domino's best positioned in this space to continue-- maybe not the momentum at this torrid pace, but to continue to grow in this way in the coming months and years?

PETER SALEH: Yeah, clearly, you know, a 16% comp in the US, not a sustainable-type number. I think we're looking at more of a sustainable growth rate in that low to mid-single digit type comp rate. But yes, I think this model works. And it-- you know, if you look at the number of stores that they close, they really don't close many stores.

On a base of, you know 17,000 units across the globe, they have very small-- a very limited amount of unit closures. So overall, this model's working. Franchisees are healthy. The value platform is really where they're winning, and value is a big portion of the pizza category. So I think the model continues-- yes, maybe not at 16% type comps, but I do think it continues to work for this company.

JARED BLIKRE: Hi, Jared Blikre here. You touched on delivery before. I just wanted to expand on that in a broader sense. There is a lot of consolidation in food delivery with Uber Eats acquiring Postmates, Grubhub joining with Just Eat. Is that a possible tailwind for Domino's because maybe they get back to rational pricing and they don't have to cut costs-- or excuse me, cut delivery prices as much on these other stores that they're serving?

PETER SALEH: Yeah, absolutely. I think over the course of the past couple of years, some of the barricades on Domino's has been the growth in many of these aggregators and the amount of discounting that they've been doing to grab market share. I think-- as there's more consolidation and there's more rational pricing among these aggregators, I think that could be a benefit to Domino's, although I think it's nominal at best I don't think they were materially impacted in the past couple years with a lot of the discounting. So I think Domino's continues to just chug along, execute really well, maybe a slight tailwind from some rationalization on pricing across the aggregators but nothing material.

BRIAN SOZZI: Peter, Domino's historically, at least for the past five or-- five to seven years, they have been slow to put out new product items. For them, it's always been a focus on efficiency. But I did talk to CEO Richard Allison a couple months ago, and they are working on new products. Do you know what they are working on and might come out this year?

PETER SALEH: Yeah, so I wouldn't characterize them as slow. I would characterize them as methodical. They don't necessarily need new products to drive their comps. They've been leaning on their digital platform to really drive their same-m store sales growth. So they use, you know, new unit-- new products every now and again. We think something is coming later this summer, early into the fall. Usually comes around the September time frame, and we believe it will be a new product on the mix-and-match, the $5.99 value platform to kind of leverage that.

Aside from that, not exactly sure what the product will be that they will launch. But suffice it to say that they have a robust product team, and they will use that lever when they see fit. And I think right now, when you're driving double-digit-type comps, there's really no reason to put something out.

ALEXIS CHRISTOFOROUS: Yeah, makes sense. All right, Peter Saleh, BTIG, thanks for being with us this morning.

PETER SALEH: Thank you.