Domino’s has enjoyed half a decade of double-digit sales growth. The company’s pizzas are tasty, affordable and delivered surprisingly quickly. However, Domino’s is at an equity deficit. Take a look at Domino’s balance sheet and you will be concerned. If Domino’s cannot continue to expand, the stock could take a hit due to its excessive debt load and questionable fortressing strategy.
Let’s take a closer look at this company’s business model, and explain exactly why investors might want to hold out for a while…
Domino’s Success
Across the past five fiscal years, Domino’s revenue has increased more than 170%, eclipsing the $3.4 billion mark in ’18. The company’s yearly net income has increased more than 132% to hit $362 million. It is important to note Domino’s growth includes double-digit hikes in net income. This past year alone, Domino’s earnings spiked an astonishing 43% on a per-share basis.
In short, Domino’s has performed better than expected for an entire decade. The question is whether Domino’s has run out of steam, or if it can continue growing as it has in the past.
Domino’s Bears
Though Domino’s is on an incredible winning streak, there is reason for worry. The company is saddled by considerable debt. Though Domino’s has grown by leaps and bounds in the past ten years, its balance sheet has extensive liabilities. The company’s debts are so significant that its gains are immediately offset by the cloud of debt that hangs ominously overhead. In particular, Domino’s long-term debt has increased on a yearly basis, hitting a whopping $3.5 billion last year.
Aggregate equity in Domino’s is just under $3 billion. The pizza-maker’s growth rates for the second fiscal quarter of 2018 for comparable-store sales decreased. Store sales in the United States increased by 3% in the quarter as compared to a nearly 7% increase in the same quarter of ’18. International sales and retail growth are also both down in the quarter as compared to the same period of time in ’18.
In other words, Domino’s is no longer growing at its usual rate. If Domino’s continues to slow down, it will temper the belief that the company can continue its rapid rate of growth, ultimately sending investors fleeing.
Domino’s Fortressing Strategy
Domino’s same-store sales are shrinking partially because of the company’s fortressing strategy. Domino’s is attempting to open more locations regardless of whether such openings compromise sales at already-existing locations. This is an odd strategy, as it will undoubtedly strain relationships between franchisees and the overarching parent company.
It is quite possible the fortressing strategy will ramp up competition, ultimately leading to a better product yet it could also lead to the closure of some Domino’s stores. Those in favor of fortressing argue increasing the number of Domino’s in any given area reduces delivery times, decreases the drive time from local households for carry-out orders and ultimately reduces the cost per order in aggregate.
Pizza Will Always be Popular
Just about everyone loves pizza. It is even better when pizza is delivered piping hot in less than half an hour. Domino’s has the pizza delivery game on lock. As the nation’s largest pizza delivery business, Domino’s earnings per share have increased threefold in a mere five years, sending the stock up more than 200%. Though the stock is down a bit for the year due to the aforementioned weakened sales growth, the company will likely hit its goal of 3%-6% comp sales growth in the next 3-5 years.
Though there is a society-wide push toward healthier food, pizza will always be popular. Even if people stray away from carb-packed pizzas, Domino’s and other pizza-maker’s can enhance the nutritional content of their offerings to cater to the public’s ever-evolving tastes and demands. In other words, Domino’s is not going anywhere anytime soon. The only question whether the company can hit its growth targets.
Buy, Sell or Hold?
Hold. If it were not for Domino’s questionable fortressing strategy and the uber-competitive pizza industry, this stock would be a fairly strong buy. However, Domino’s has an abundance of competition, shrinking sales growth and potentially misguided leadership.
If Domino’s deviates from its fortressing strategy, investors should pay close attention to this stock. Otherwise, hold your current Domino’s position or consider taking some profits off the table if you have been invested in this pizza-maker for several years. Those who do not currently own Domino’s can find better stocks to invest their money in.
