Domino’s Earnings Preview: Looking at International Expansion
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Tomorrow Domino’s Pizza Inc. (NYSE: DPZ) will announce its fourth quarter earnings for 2011 and its plans for the 2012 year. Analysts aren’t expecting much from the pizza delivery giant, with the average earnings estimate at 48 cents per share, which is the same average three months ago. With net income increasing over the past three quarters, the company has said it expects to set aside $25-35 million to invest in new technologies and international stores. Given the increasing amount of data supporting a European recession, however, and the potential for a Greek default to produce another global financial crisis, international investment may be a risky bet right now.
Accounting for half of the company’s sales, Domino’s stores outside of the U.S. have allowed Domino’s to become a viable competitor against Papa John’s Inc (NASDAQ: PZZA), and Yum! Brands Inc. (NYSE: YUM), which owns Pizza Hut, KFC and Taco Bell. In fact, the company said in June 2011 that it expects the number of its international stores to surpass the number of its domestic stores, something that Papa John’s and Pizza Hut haven’t been able to do.
Domino’s says it expects five to eight percent growth in global retail sales, which includes domestic sales, and increases of three to six percent in international same-store sales growth. Pizza, the company says, is a global phenomenon. Unlike other restaurant concepts, such as McDonald’s burgers and fries, pizza enables local preferences by allowing different toppings, sauces and spices to the traditional pies.
While the international market has fared well for Domino’s, it should be worth noting that the company may be in a vulnerable position in Europe. Finance ministers announced Thursday that they are all planning for austerity in 2012, as they expect the economy of the 17-country zone to contract 0.3 percent during the year—the same amount by which it contracted last quarter, producing a recession.
Nearly all of the European Commission’s growth estimates have changed, with Greece expecting to shrink by 4.4 percent compared to previous forecasts of 2.8 percent, Italy by 1.3 percent and Spain by 1 percent. France, Germany and the UK, however, are all expected to grow, but in the 0.4-0.6 percent range, which is smaller than what the commission had previously predicted. Other countries previously predicted to grow during 2012, such as Belgium, Cyprus and the Netherlands, are all expected to contract now as well.
With 35 percent of its income coming from its international stores, the majority of that coming from franchise royalty fees, that makes Domino’s reliant on the growth and revenue of new franchises, something that likely won’t happen in Europe given the looming recession.
The company has already acknowledged potential problems with foreign currencies in the upcoming futures. Most of the areas it acknowledged ask risk factors were of course the United Kingdom and Europe, whose currencies may become weaker in the upcoming months. As of Q3 2011, the company had 641 stores in the United Kingdom, with an expressed goal of stretching that number to 1,100 stores. The company also had plans to expand its 191 stores in France to 850, a difficult goal to have in difficult times.
If Europe falls back into another recession, Domino’s will have to look to its emerging markets to save the international half of its business. While it has a strong presence in India and Turkey, Domino’s has little to no presence in China. Dairy is not typically part of many Chinese diets, making it a difficult product to sell. Competitor Yum! Brands Inc., on the other hand, found a way around that problem by marketing its Pizza Hut brand as a dine-in restaurant without pizza as its menu centerpiece. That could potentially hurt Domino’s, in comparison to Yum! Brands, as China may fare better than Europe in the upcoming months.
That means plans of investing in Asia, specifically in India and Turkey, should be something to look for in the company’s report next week. While it has room to improve in Japan, where its 191 stores rank third in the delivery market, and clearly a long way to go in China, the company has real potential in the Indian and Turkish markets. In India, Domino’s claims to be the largest international brand and makes up 67 percent of the delivery market. In Turkey, same-store sales have growth 14.5 percent over the last five years. Fifty-four of its 150 stores opened within the last four quarters, clearly showing the potential of the market.
With the company planning to invest $25-35 million during 2012, it is important that investors know how and where that “international” development will be spent. Will Domino’s take Thursday’s economic reports to heart and think carefully about its European operations or continue with its goals of adding 1,118 stores to just the United Kingdom and France alone?
Motley Fool newsletter services recommend Yum! Brands. The Motley Fool owns shares of Domino's Pizza, Papa John’s International and Yum! Brands. shthomas has no positions in the stocks mentioned above. 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.
