Domino’s Pizza: Smoothly Handles Big Changes

“Domino’s Pizza had unbelievable numbers, up more than 5% or so. The US pizza-maker was able beat on the top and bottom. Domestic sales showed growth, had been flat.” — Squawk on the Street 3/2/2010

Domino’s Pizza (DPZ) reported solid results for the fiscal fourth quarter as they reported EPS of $.30 versus a consensus of Wall Street analysts of $.25. Perhaps more impressive though was the 8.1% revenue growth seen in the quarter as sales hit $462.9 million versus estimates of $437.5 million. Management heralded growing traffic in all four quarters, with the most impressive gains in the last quarter and that momentum continues into 2010. For the fiscal year, the company expects global retail sales to grow by 4% to 6% and will add between 200 and 250 locations in the year.

Domino’s was not afraid to mix it up over the last year, and the results thus far have been impressive. They made huge changes to their pizza products in confronting poor taste test results head on, and even making light of customer complaints in a national media campaign (Investor’s Love Domino’s New Recipe). Their lackluster products had led to none existent top line growth since peaking in fiscal 2005 at $1.5 billion, but the refreshed pizza is starting to show positive results. Although, the company’s January launch of the new pizza was not included in the fourth quarter figures. Furthermore, the company recently lost its CEO of more than a decade as he took the Athletic Director position at his alma mater, The University of Michigan.

Transitioning both leadership and a company’s core product could often spell doom for shareholders, at least in the near term, but Domino’s has been greatly outperforming since the start of the year. Domino’s is up 56% year to date, which compares to essentially flat results for the S&P 500 index this year and a return of just 5.5% for competitor Papa John’s (PZZA). According to our methodology, this impressive performance has not yet made us concerned about DPZ’s valuation, as we currently see the stock as Fairly Valued. At the current price, the stock is sitting comfortably within its historically normal price-to-cash earnings and price-to-sales ranges. Given the current level of fundamentals we could see this stock hitting $16 before considering a downgrade to Overvalued. However, if Domino’s is able to achieve the revenue growth that it guided the market with today (4% to 6% in 2010), the stock could hit $22 before we start to become skeptical of the valuation.

Domino’s Pizza: Smoothly Handles Big Changes

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