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Now could be the time to invest in a slice of Domino's

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There's no doubt that the COVID-19 lockdowns have negatively affected many industries and businesses.

However, there are some companies that have remained resilient amid the challenges of employees working from home, limited mobility and closures of restaurants, theatres and pubs.

In the US, the food delivery sector has shown its strength during the lockdowns. In fact, this could be one of the few sectors that have seen an increase in demand as more people are forced stayed at home.

dominos pizza shares covid19

One company that has benefited from the rise in demand for food delivery is Domino's Pizza (NYSE: DPZ).

As the US reporting season kicked off this month, DPZ reported some strong numbers that beat market expectations:

  • Same-store sales (in the US) soared 16% as more consumers order delivery
  • Domino's earned US$2.99 per share during the last quarter
  • Total revenue rose 13.4% to US$920 million in the quarter ended June 14, which is above expectation of US$911.5 million
  • Net income rose 28.5% to US$118.7 million
  • International same-store sales rose 1.3%.

Looking at the charts, the pizza chain's shares have risen around 40% this year so far.

Share price performance

If you bought Domino's Pizza Inc (NYSE: DPZ) shares when the company went public in 2004, your initial investment at the time of around US$14 per share would have skyrocketed to more than US$400 per share this month.

Even if you missed the first few years and invested in the pizza giant when the share price was sitting just above US$100 in late 2015, this would have delivered a tasty four-fold return on your investment over that period.

Following 18 months of consolidation in a wide band below US$300, prices broke sharply above this level in late February 2020 on the release of a positive earnings 'surprise'.

Although prices soon dipped back to the US$300 region, solid gains emerged in late March and April to confirm resumption of the longer-term upward trend.

A further bout of strength in July has been bolstered by expanding trading volumes suggesting wide support for the higher prices. Good support now sitting between US390 and US$360 is seen providing a base upon which further gains can be built.

With COVID-19 continuing to get worse in the US and more lockdowns likely, it is conceivable that demand for home delivery pizza will go through the roof and take the DPZ share price with it.

What analysts are saying about Domino's

One analyst group pointed out that DPZ has delivered pleasing returns - around 17% - over the past five years, which beat market estimates. The one-year period showed a total shareholder return of 15%.

Another major research and analysis company shared a similarly positive review for DPZ.

In a recent statement, the industry analyst group said: "Despite the chain's French and New Zealand stores closing for a period during the pandemic, the brand demonstrated strong first-half performance."

The analysts also pointed out that the strong performance amid the lockdowns plus the management's plan to target new store openings of 7% to 9% per annum and same-store sales growth of 3% to 6% per year over the next five years, is sufficient to underpin solid earnings growth over the period and could drive the Domino's Pizza share price notably higher."

From their perspective, Domino's presents a good opportunity for investors.

dominos app delivery

Impact of COVID-19 lockdowns

While some DPZ stores were closed at the height of the COVID-19 lockdowns in some countries, pizza delivery overall has picked up. Any increase in pizza delivery will clearly boost revenue.

In his statement during the release of the company's financial results, Domino's CEO Ritch Allison said: "Consumers' ordering behaviour during the pandemic led to the sharp rise in sales. We saw a rather unprecedented acceleration in food delivery."

He added that whether lockdowns will continue or not, consumers are expected to put a high priority on food safety, which is expected to provide more tailwind in delivery in the near-term.

Domino's, which is known for its innovative use of technology to boost sales, also introduced a new contactless car side delivery option for take-away orders in the US at the height of the pandemic lockdowns.

About Domino's Pizza

While it's now recognised as a giant in the fast-food delivery industry with an estimated 15,000 stores across the globe, Domino's started in 1960 as a small pizza restaurant bought by two brothers (Tom and James Monaghan) with a US$500 down payment.

Within five years, two other pizzerias were added which started the growth of the pizza chain. In 1967 Domino's opened its first franchise store and since then has seen an almost unstoppable growth with stores all over North and South America.

The company grew its global footprint despite being a privately-owned business. But in 1998, after 38 years of ownership, Domino's founder Tom Monaghan sold 93%of the company to Bain Capital, Inc. for about $1 billion.

In July 2004, after 44 years as a privately held company, Domino's listed in the New York Stock Exchange under DPZ.

As of September 2018, Dominos has locations an estimated 15,000 stores across the globe with 5649 in the US, 1232 in India, and 1094 in the UK.

Some facts and figures about Domino's:

  • Domino's world's fastest pizza maker Werner Lomker can make three large pizzas in just 57 seconds.
  • More than 94% of Domino's stores in the U.S. are franchise-owned
  • Domino's has about 770 independent franchise owners in the US
  • Domino's stores across the globe sell an average of 3 million pizzas a day
  • Domino's operates 17,000 stores in more than 90 countries around the world (Q1 2020)
  • Domino's estimates that it has more than 350,000 franchised and corporate team members worldwide.

Conclusion

Given the company's strong performance and continuing expansion, we believe DPZ is a buy. Lockdowns or no lockdowns, there are signs that consumers have changed their buying behaviour which will drive more online sales and safe fast food delivery.

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Alex Douglas is managing director of Monex Securities Australia (AFSL 363 972), and is responsible for the overall growth of Monex in this region. He has held senior executive positions with numerous financial services companies both in Australia and Asia over the past three decades. Early roles in the industry included being a foreign exchange voice broker, a trader on the floor of the Sydney Futures Exchange and a senior analyst with Standard & Poor's in Singapore.  Alex is a Certified Financial Technician (CFTe) and former board member of the International Federation of Technical Analysts (IFTA) as well as a sought-after author, speaker and market commentator.
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