Domino's Pizza Stock (NYSE:DPZ): Why I'm Expecting New Highs Soon


It looks like Domino's pizza (lol)New York Stock Exchange:DPZ) stock prices could soon reach new all-time highs. The world's largest pizza franchisor is enjoying strong growth momentum, driven by bold new store openings and strong same-store sales growth. The company is also expanding its margins, further strengthening its profitability outlook. Domino's Pizza stock isn't cheap, but the company's earnings growth trajectory suggests its ongoing rally may be sustained. Therefore, I am bullish on DPZ stock.

DPZ is up 67.9% over the past year and is near its all-time high.

New store openings and increased same-store sales drive profit recovery

Domino's Pizza's revenue decreased by 1.3% in FY2023, but it looks like a strong recovery is expected in FY2024. The company posted revenue of $1.08 billion in the first quarter, an increase of 5.9%, the highest revenue growth in six quarters. This was driven by both new store opening momentum and same store sales growth.

Regarding same-store sales growth, looking at the US, there was a significant increase of 5.6%. This result was driven by a 9.5% increase in carryout (picking up pizza from a store instead of having it delivered) and a 2.9% increase in deliveries, primarily driven by increased transactions. This was driven by growth from Domino's Pizza's new loyalty program, including continued gains from the “Emergency Pizza” promotion, his 0.9% profit from pricing, and a 1.4% increase in sales mix from Uber.

Meanwhile, same-store sales growth overseas was modest at 0.9%, but still a welcome development.

In terms of new store openings, Domino's Pizza continued its momentum, adding a net total of 164 stores during the quarter. This resulted in net new store additions of 747 stores over the subsequent 12 months. Domino's Pizza therefore had a total of 20,755 stores at the end of the quarter, compared to 20,591 at the end of last year. It's clear that market demand for Domino's Pizza remains strong, with new store openings (see below) quickly meeting local demand.

Source: DPZ Q1 2024 Earnings Report

Achieving outstanding profitability by expanding profit margins

Domino's modest single-digit sales growth in the first quarter may not grab investors' attention, but its improving profitability probably will. For those unfamiliar with Domino's business model, it's worth noting that 99% of its stores are franchised. Through this model, Domino's easily collects royalties equal to 5% of each store's total sales. Additionally, as the sole distributor of all essential ingredients to its stores, Domino's enjoys a streamlined model that makes it much easier for them to scale their profits as they expand over time.

In particular, Domino's Pizza's supply chain gross profit margin expanded from 9% last year to 11.1%. Profit margins for company-operated stores (albeit a small portion of revenue) also rose from 16.9% to 17.5%. Most importantly, his operating margin rose to 19.4%, in addition to collecting higher royalties (the largest portion of revenue) due to increased same-store sales and new store openings with no additional costs. . This is a notable expansion from last year's operating margin of 17.3%.

As a result, Domino's Pizza's operating income increased by 18.4% to $210.4 million, and its net income increased by 20.1% to $125.8 million. With the reduction in the number of shares due to share buybacks, the earnings per share increased. It also increased by 22.2%. Now, looking back at the single-digit revenue growth, you can see the quality of Domino's Pizza's business model and why investors have consistently been willing to pay a premium for the stock.

Domino's Pizza's valuation remains reasonable

Speaking of Domino's valuation, I believe the stock is priced fairly high. Because of this, I see room for further upside from current levels. First, the consensus earnings per share forecast is expected to increase 8.4% to $15.89, which I believe is very conservative given the strong earnings per share growth in the first quarter. However, even assuming this forecast holds true, Domino's stock is still trading at roughly 32 times this year's expected earnings.

Considering Domino's Pizza's expected double-digit earnings growth for years to come, as well as the quality and brand value of its business model, this multiple seems very reasonable. For context, DPZ stock has consistently traded at much higher multiples in the past despite similar growth prospects. Therefore, the stock price is expected to reach new highs sooner or later from current levels.

Is DPZ stock a buy, according to analysts?

Looking at Wall Street sentiment towards the stock, Domino's Pizza has a Moderate Buy consensus based on 16 Buys, 11 Holds, and 1 Sell assignments over the past three months. It features a rating. DPZ's average price target is $543.19, implying 6.2% upside potential.

If you're not sure which analyst to follow when buying or selling DPZ stock, check out Chris O'Cull of Stifel Nicolaus. Over the past year, he has consistently performed well, with his average return per rating of 31.02% and a success rate of 96%. Click on the image below for more information.

Take-out

In conclusion, I believe Domino's Pizza is poised to hit new all-time highs in the near future. The company's continued trajectory is undoubtedly impressive. Domino's Pizza demonstrated a solid earnings recovery, supported by new store openings and strong same-store sales growth, with impressive profitability driven by margin expansion.

Although the stock trades at a premium valuation, Domino's potential for continued double-digit earnings growth makes the current multiple look reasonable, which is my bullish stance.

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