Are You Ignoring This Restaurant Chain?

Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Jimmy Dean once said, “I can’t change the wind, but I can adjust my sails to always reach my destination.” Domino’s Pizza (NYSE: DPZ) has proved the saying true with its first-quarter results.

In the first quarter, Domino's grew its comparative-store sales by 8.6%. The company generated total revenue of $417.62 million and earned $0.59 per share. Analysts at Thomson Reuters had estimated the revenues to be $413.77 million and the earnings to be $0.55 per share. Its global retail sales grew by a solid 9.4% driven by domestic same store sales which rose 6.2%.

The results become even more impressive if we factor in the rising food prices and deterrents like a weak consumer spending environment and falling number of restaurants visits. This solid performance was largely due to the company’s business model, smart strategies, and global growth.

Vertically integrated business model

Domino's has a vertically integrated business model whereby it supplies dough, thin crust, processed vegetables, and other food items to all its company-owned stores and over 99% of its franchised stores.

Food supplies are mostly made with a fixed markup on the actual purchase costs. This has been a winning strategy for the company, as it protects profits in the face of volatile food prices.

The other big advantage is that this allows Domino's to keep solid control over the quality of food served at the franchised stores. Often, restaurant chains which follow a franchise model land in trouble on account of quality-control issues.

Domino's runs this supply-chain business exceedingly well and has achieved a lot of operating leverage. During the first quarter, it grew its profits by over 20%, although revenue grew 11.3%.

Good retail strategies

In the current retail scene, the importance of online and mobile platforms cannot be emphasized enough. Domino's has done an excellent job in strengthening its foothold in both areas.

The company generates around $1 billion in sales from its digital ordering platforms in the US and another $1 billion overseas. Digital ordering accounted for 35% of total sales in the first quarter

Meanwhile, like every other quick-service restaurant, Domino’s has started its campaigning of “Great Food at Great Value." CEO J. Patrick Doyle aptly summarizes the situation by saying, “For under $25, including a tip for delivery, you can feed a family of four with pizza, something that we feel keeps our category strong in an uncertain economy versus other segments of the restaurant industry.”

The company is also promoting value offers like the "Double Value Deal" where it offers two regular-sized pizzas for $22 only. It has a $5 "Carry-out Lunch" offer featuring a two-topping small pizza, penne pasta or oven-baked sandwich.

International expansion

Domino’s is doing well in international markets and posted solid 6.5% growth in same-store sales during the first quarter. Due to its good value proposition, it is seeing sales growth even in Europe. The company’s UK master franchisee reported strong results.

Domino’s is in the early stages of growth in Asia. This is a relatively untapped market and pizzas are gaining popularity. The company has recently opened its 250th store in Japan and is making progress in China and India.

It opened net 80 stores internationally during the first quarter. It will be investing an additional $13 million over its 2012 spending to support and expand its international operations in 2013.

Menu reinvention and expansion

As always, the key to the success of any restaurateur lies in its ability to serve good food according to the tastes and preferences of its visitors and its ability to innovate so that it can keep them interested. Domino's passes the test on both accounts.

One of the items worth mentioning is the high-quality, fresh-dough handmade Pan Pizza which it introduced in the fourth quarter of 2012 and has been an instant hit. In addition to driving traffic it also helps that the pizza carries a $7.99 price point for a two-topping medium version — $2 more than the regular medium, two-topping hand-tossed pizza

Domino's has also added a number of other unique entrees, sides, and desserts to its menu. Oven Baked Sandwiches, Penne Pasta, Boneless Chicken, and Wings are all featured in the company’s restaurant and catering menu.

Competition

In the US, Domino’s competes with national chains like Pizza Hut, which is owned by Yum! Brands (NYSE: YUM) and Papa John’s (NASDAQ: PZZA), as well as regional players. In the international scene it is mostly pitted against Pizza Hut.

Out of the three, Domino’s has reported the best growth in the first quarter in the US. Its 6.2% growth in domestic same-store sales was no match for Pizza Hut’s 1% decline and Papa John’s 1.6% increase. This means that competitive pressures on Dominos would increase as the rival chains engage in aggressive promotions and innovations.

Pizza Hut has recently introduced its Crazy Cheesy Crust pizza in the US as a limited time offer. The company is trying to repeat the success story that it had in 1995 with its original stuffed crust pizza. This was also introduced as a limited time offer but it was so successful that it boosted sales by $300 million by the end of the year. It has remained on the menu since then.

In the value scene, Pizza Hut is making offerings like different lunch-combo meals to customers at $7.95.

Meanwhile, Papa John’s is also aggressively promoting its fare. One of the most adored products of Papa John’s is its Buffalo Chicken Pizza. It is a combination of the chain’s signature pizza and popular Buffalo chicken wing.

The chain is following an aggressive expansion strategy both in the US and overseas. During the quarter the company opened 34 stores, among which 17 are located in the US and 17 abroad.

There is good momentum in the chain’s international operations and Papa John’s is expecting to reach its 1,000-store landmark this summer. The international stores saw same-store sales growth of 8.2% in the first quarter.

Conclusion

Despite the tough competition, Domino’s has been able to hold its ground. Its strong franchisee-based structure ensures that it reads the local customer sentiments correctly and accordingly keeps menu innovations coming.

Easy accessibility through mobile and online sites, effective promotions, and an efficient delivery system that delivers within 30 minutes has given the company a solid competitive edge. Overall, Domino’s remains a compelling growth story.

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Gaurav Basu has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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