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Domino's (DPZ) Rallies 22% in 3 Months: Will the Upside Last?

·4 min read

Shares of Domino's Pizza, Inc. DPZ have gained 22.4% in the past three months compared with the industry’s increase of 19.2%. The company is benefiting from robust digitalization, expansion efforts and sales-building initiatives. However, staffing challenges, supply chain problems and inflationary pressure hurt the company. Let’s delve deeper.

Growth Drivers

Domino’s is investing heavily in technology-driven initiatives like digital ordering to bolster sales. Domino’s digital loyalty program — Piece of the Pie Rewards — continues to contribute significantly to traffic gains. The extended ways to order a pizza have thus kept Domino’s at the forefront of digital ordering and customer convenience. The company has more than 29 million active members in its Piece of the Pie loyalty program. The company has almost 70 million customers enrolled in its loyalty database.

Moreover, other digital enhancements in terms of ordering, selecting service methods, paying and tipping were implemented to enhance the consumer experience. It continues to innovate aggressively across all aspects of its business, including GPS, e-bikes, AI in-store technology, great food and an evolving digital experience.

During the third quarter of fiscal 2021, the company made substantial progress regarding its Carside Delivery. With consistent waiting time-averaged below two minutes, franchisees and operators have enthusiastically embraced this new service method. Also, it was successful in bringing in new customers as well.

Since this Zacks Rank #3 (Hold) company generates a chunk of its revenues from outside the United States, the company remains committed to accelerating its presence in high-growth international markets to boost business. Meanwhile, the company’s international growth continues to be strong and diversified across markets, courtesy of exceptional unit-level economics.

During the fiscal second quarter, the company added 22 net new stores in the United States, thereby bringing the total U.S. system store count to 6,619 stores. During the quarter, its international business added 211 net new stores (reflecting a store growth rate of 9% year over year). The company also initiated its 500th store opening in China. Other markets of store growth included India, Mexico, Spain, Turkey and Guatemala. Together with the United States and international store openings, the company reported global net store growth of nearly 7%. The company remains bullish on the long-term unit growth potential in the United States, with the anticipation of an 8,000-plus store market. Also, it is confident about its two to three-year outlook of 6% to 8% in annual global net store growth.

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Zacks Investment Research

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Hurdles to Cross

Inflationary pressure in commodity, labor and fuel costs continues to hurt the company. The industry players expect to witness higher costs due to labor and supply chain shortages for quite some time. The company has been witnessing labor challenges in a handful of markets. During the fiscal second quarter, the company’s total cost of sales amounted to $678.9 million compared with $624.8 million reported in the prior-year quarter. The company anticipates fluctuations in commodity prices (including wheat) and fuel costs arising from geopolitical risks and the impact on the overall macroeconomic environment.

Moreover, during the fiscal second quarter, comps at Domino’s domestic stores (including company-owned and franchise stores) declined 2.9% year over year against 3.5% growth reported in the prior-year quarter. The downside was primarily due to a fall in order counts partially offset by ticket growth. Limited operating hours (due to staffing challenges) and supply chain challenges (driven by labor issues within distribution channels) further added to the downside.

Key Picks

Some better-ranked stocks in the Zacks Retail-Wholesale sector are Potbelly Corporation PBPB, Arcos Dorados Holdings Inc. ARCO and Dollar Tree Inc. DLTR.

Potbelly has a Zacks Rank #2 (Buy), at present. PBPB has a trailing four-quarter earnings surprise of 26.2%, on average. Shares of PBPB have declined 0.3% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Potbelly’s 2022 sales and EPS suggests growth of 14.1% and 90.4%, respectively, from the corresponding year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2. ARCO has a long-term earnings growth of 34.4%. Shares of the company have increased 38.4% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 25.7% and 120.8%, respectively, from the year-ago period’s levels.

Dollar Tree carries a Zacks Rank #2. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average. The stock has gained 66.5% in the past year.

The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and EPS suggests growth of 6.7% and 40.5%, respectively, from the corresponding year-ago period’s levels.

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