Domino's (NYSE: DPZ) is set to post its earnings results before the market opens on Thursday, July 19. The restaurant chain is facing elevated expectations on the part of investors, who've made the stock one of the industry's best performers so far in 2018. But will the pizza delivery giant live up to those high hopes?
Market share at home
Sales growth jumped to an 8% pace last quarter from 4% in the prior quarter. That translated into significant market share gains, given that Papa John's posted a 5% sales decline and Pizza Hut, owned by Yum Brands, inched up by just 1%.
Domino's relies on a few key advantages to keep its sales growth running ahead of peers. Its network makes deliveries quick and cost-effective, for example, while smaller operators and third-party food delivery specialists often struggle to profit from these trips. The company is also a leader in technology, with over 60% of its sales coming from online channels.
Domino's investors are hoping those advantages lift results this quarter. Two initiatives in particular might have an impact on this week's report. First, the fast-food giant recently added hundreds of new delivery spots to its network through a program it calls "hotspots" that targets non-traditional delivery points like parks and beaches. And second, it is making an aggressive push in the attractive carryout niche.
Domino's international segment accounts for a relatively small portion of its profits, but the division plays a key role in the company's long-run growth ambitions. Management wants to add 5,000 locations to its top international markets over the next few years, compared to the 3,000 it is targeting to launch in the mature U.S. segment. That expansion project relies on steady growth at existing locations, so investors will want to see comparable-store sales stay within executives' target range of 3% to 6% after reaching 5% last quarter.
The company has managed positive comps in this division in each of the last 97 quarters, so there's little risk of trends turning negative on Thursday. A robust expansion pace, on the other hand, should give management the confidence to continue pushing into new markets even in areas that aren't as excited about pizza as Domino's U.S. customers are.
Domino's makes aggressive use of debt, and its liabilities are pushing right up against the top end of management's targets. In fact, its leverage ratio last quarter approached 6 times annual adjusted earnings compared to the goal range of between 3 and 6.
Executives believe they have a good handle on that debt as the corresponding interest charges this year reach about $145 million compared to operating earnings of over $500 million.
The borrowings help fund Domino's aggressive store expansion goals, after all, while allowing for flexibility in opportunistic stock repurchase spending. The chain generates significant cash flow from its franchise-heavy operating model, and its small-format stores aren't expensive to open. Thus, investors can likely expect debt to continue to play a big role in the chain's funding and capital return plans even as interest rates creep higher.
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