Stock Watch: Domino’s Pizza (DPZ) looks poised for strong recovery

The business world is slowly getting back on track after the authorities eased restrictions and economic recovery gathered steam, but some sectors that thrived on the pandemic-driven boom earlier are witnessing a slowdown now. Grocery chains and fast-food companies were among the top gainers when customers switched to online shopping.

The stock of restaurant chain Domino’s Pizza, Inc. (NYSE: DPZ) had an unimpressive start to 2022 amid softening sales, after hitting a record high in the final weeks of last year. The stock has headed southwards since then, which can be partially attributed to the market selloff. Meanwhile, the company’s mixed first-quarter results failed to impress the market because earnings suffered due to higher costs and muted revenue growth.

The Stock

The good news is that the current slump is temporary and DPZ seems to be on its way to recouping recent losses and breaching the $400-mark this year. It is one of the most popular food brands with a significant presence across the globe and enjoys stable demand both online and offline. When it comes to investing in Domino’s, the pros outweigh the cons. It is worth noting that the company was among the largest pizza chains even before the pandemic.

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Read management/analysts’ comments on Domino’s Q1 2022 results

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The management is busy bringing innovation to the business through various initiatives — from introducing new flavors and expanding the store network to ramping up the digital platform and improving delivery times. The company has a healthy balance sheet and generates significant free cash flow. The strong liquidity position allows it to reward shareholders regularly through share buybacks and dividends.

Q1 Results

The company has generated positive same-store sales growth for more than two decades consistently in the overseas market. International comparable-store sales moved up 1.2% in the first quarter when total sales rose 3% to about $1 billion as continued growth in the core business more than offset lower sales in other areas. Meanwhile, net profit declined to $91 million or $2.50 per share from $118 million or $3.0 per share last year.

From Domino’s Q1 2022 earnings conference call:

“Other markets of note with strong growth in the quarter included Mexico, Spain, Turkey, Taiwan, Iceland, and Guatemala. Our master franchisees across the globe continue to show resilience and a strong belief in the future of the Domino’s brand in their markets. The combination of our global brand and systems with their local expertise gives me great confidence in both the long- and short-term growth prospects in international. And with nearly 96% of the global population and 75% of the world’s GDP residing outside the US we are just getting started.”

Risks

The main challenge facing Domino’s and its peers in the fast-food industry is competition, with new players entering the online space and making it easier than ever to have anything delivered anywhere. Some experts caution that the strain on margins due to high ingredient costs might prompt the Domino’s management to hike prices, which in turn would affect sales.  

DPZ traded at a two-year low this week, with the post-earnings selloff adding to the weakness. The stock is down 40% from the levels seen at the beginning of the year. However, it closed Thursday’s regular session higher.