Domino's Pizza (NYSE: DPZ) is on a roll. The delivery and carryout specialist's stock recently hit a new high following the announcement of robust sales and profit growth in its fiscal first quarter.
After that report, CEO Patrick Doyle, who is retiring at the end of June, held a conference call with Wall Street analysts to put the results into context for investors. Below are a few highlights from that presentation.
Management celebrated the return to robust revenue growth as comparable-store sales gains shot up to 8% in the core U.S. market from 4% in the prior quarter. The international segment accelerated, too, climbing to a 5% increase. Executives tried to stress the bigger picture that includes Domino's expanding store footprint, though. After adding 110 stores, mainly in international markets, its base ended up just shy of 15,000 locations compared to 12,000 just six years ago.
Delivery is hard
Healthy growth on the delivery side of the business supports management's claim that rival third-party services like Grubhub just don't pose the type of threat that many investors had feared. These aggregators face high costs that are difficult to pass on to customers, executives said. And they're "learning something we have known for almost six decades," Doyle explained. "Delivery is hard."
Just a week prior to the earnings release, Domino's announced an upgrade to its delivery program called Hotspots that allows customers to have food brought to any one of almost 200,000 locations that lack traditional addresses. These include places like parks, beaches, and sports fields, and the company believes the move should drive additional sales gains.
More importantly, the offering keeps Domino's firmly in the industry's leadership position on technology. That aggressive approach is a key reason the digital sales channel has expanded to 60% of its overall base from a standing start roughly a decade ago.
Domino's remains a heavily leveraged business, with debt this quarter landing at $3.15 billion, or about one third of its market capitalization. That's at the high end of management's target, but executives aren't concerned about the burden.
For one, the company has locked in modest interest rates for years to come. Its latest recapitalization delivered rates of roughly 4.2%, for example. Overall interest charges are projected to be $145 million for fiscal 2018, compared to $123 million last year. That's just a modest drag considering operating earnings were over $500 million last year.
Meanwhile, the debt is helping fund aggressive store expansion plans. Executives believe the U.S. market could support as many as 8,000 locations, up from 5,000 today. There's also space for over 5,000 new stores in just its top 15 international markets, they say. Given the robust demand for its delivery and carryout services today, those expansion targets don't look unreasonable.
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