Online Channel With International Expansion Will Be the Growth Driver for This Pizza Company

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

Domino’s (NYSE: DPZ) is looking for growth options outside the domestic market, and international growth is included in its plans. The online and mobile platform, with various apps to make effective use of the latest multimedia technology, is important for the future. The nation-wide promotion of pan pizza was one of the factors behind the 5.2% comps growth last quarter, and consequently the company is increasing its advertising budget. Now, let’s discuss these initiatives in detail. 

Online channel with multiple ordering options is expected to boost the top-line

Domino’s is exploring online channels to increase sales. Its online ordering platform is quick and more efficient and has greater flexibility. Customers have the option of ordering from desktop, mobile, android and iPad. The company has launched Kindle Fire, Android and iPhone ordering, which covers 80% of the smartphone market. In fiscal 2012, online sales contributed 44.9% to the total sales, and the company is looking to make this channel stronger. Domino’s Live is another initiative where customers can see a live, uncut feed and glimpse of restaurants. 

International stores expansion will also drive sales

International stores expansion was the sales driver for the company with net increase of 340-350 units last year which was around 4% YOY. The company got success in diverse global markets of Turkey, South Korea and Brazil with positive comps even in Spain, which is suffering from a bad economy. Domino’s is looking for 4%-6% annual increase in international stores expansion with expectations of 6% to 10% growth in international sales. The company is looking for growth in all emerging economies, and China will be the point of focus for the long term. It is also customizing products according to the local taste with seafood and fish toppings in Asia, curry in India and meat in turkey. 

Increased advertising budget is expected to increase footprint

Domino’s launched handmade pan pizza successfully in the fourth quarter of the last fiscal year, which was able to attract more customers to its stores. Customers prefer fresh dough products over frozen products, and this will be crucial for future growth. Franchisees have also benefited from national advertising and they have asked for a 6% increase in the advertising budget. Promotional events with a focus on digital technology are expected to bring more customers to stores.

Peer Analysis

Two competitors of Domino’s in the fast casual pizza category are Yum! Brands (NYSE: YUM) and Papa John’s International (NASDAQ: PZZA). Yum! Brands is going strong with its three brands, KFC, Pizza Hut and Taco Bell. Yum! is aggressive in its store growth with 949 new stores opened in the last fiscal year. It is moving ahead with a strong presence in the emerging markets of China and India and declared India as a separate division last year. In the US, Taco Bell continues to be the growth driver with 8% growth in the last quarter. The launch of the Doritos  Locos Taco and Cantina Bell Menu brought in record sales of $375 million last year.

Papa John’s is also looking at international store expansion as a growth option in the future. It opened 280 international units last year and is expecting to add net 134 international units in FY 2013. The company is increasing its capital expenditure in 2013 to $55 million-$60 million, up from $43 million last year. This investment will be in company owned stores in the US and China. Its investment in a state of the art dough production facility and a quality center in New Jersey will help it to supply fresh dough and high quality ingredients in the Northeast region. These investments in store expansion and technology are expected to drive the company’s sales in the future.

Company

P/S ratio

Op. margin

1Yr. Fwd. P/E

Domino's

1.75

18.08%

21.69

Yum! Brands

2.85

19.21%

18.48

Papa John's

0.97

8.33%

18.33

Domino’s has been able to achieve an operating margin of 18.08% with a relatively low 1-year forward P/E ratio of 1.75. Yum! has a relatively lower forward P/E and the highest operating margin of 19.22 among these three peers. Papa John’s has the lowest forward P/E of 18.33 and P/S ratio of 0.97.

Conclusion

Domino’s is focusing on multiple online channels for orders and international expansion for growth. Its increased advertising budget is expected to increase footfall in its stores. Yum! has three brands with strong international store growth plans. Papa John’s is also investing in new stores and technology for sales growth. So, I recommend a “buy” for all the three stocks mentioned as long term investments.

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Ash Sharma 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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