Revenue Radar: Domino's refocuses on US as international expansion wobbles

Domino’s Pizza, the world’s largest pizza company, has reported strong financial results for the second quarter of 2024, demonstrating the effectiveness of its “Hungry for MORE” strategy in driving growth amid challenging economic conditions.

Section 1: Financial Performance

Overview Summary of Key Financial Metrics

• Quarterly revenue: $1,097.7 million (up 7.1% year-over-year)
• Net income: $142.0 million (up 29.8% year-over-year)
• Diluted Earnings per share (EPS): $4.03 (up from $3.08 in Q2 2023, a 30.8% increase)

Domino’s Pizza’s second-quarter performance for the period ended June 16, 2024, presented a largely positive picture, with the company reporting strong growth across key financial metrics. The company’s revenue increased by 7.1% year-over-year, reaching $1,097.7 million. This growth was primarily driven by higher supply chain revenues, increased U.S. franchise advertising revenues, and higher U.S. franchise royalties and fees.

The company’s net income saw a substantial increase of 29.8% year-over-year, reaching $142.0 million. This growth significantly outpaced revenue growth, indicating improved operational efficiency and profitability. Additionally, the company’s diluted earnings per share (EPS) increased by 30.8% to $4.03, up from $3.08 in the same quarter of the previous year. This strong EPS growth, closely matching the net income growth, suggests that the company has not significantly diluted its stock during this period.

However, the company’s performance was not uniformly positive across all segments. US Company-owned store gross margin decreased by 1.0 percentage point compared to the same quarter in 2023, primarily due to higher insurance costs and increased labour costs resulting from higher wage rates. This decrease was partially offset by sales leverage due to higher customer transaction counts.

On a more positive note, the supply chain segment showed improvement, with gross margin increasing by 0.4 percentage points. This increase was primarily attributed to procurement productivity, although it was partially offset by investments in supply chain labour.

Factors influencing performance

One of the primary factors contributing to Domino’s strong performance has been the successful implementation of its “Hungry for MORE” strategy. CEO Russell Weiner noted that for the second straight quarter, the company drove U.S. comp performance through profitable order count growth, with positive order counts in both delivery and carryout businesses across all income cohorts.

The company’s supply chain revenues benefited from higher order volumes and an increase in food basket pricing to stores, although this was partially offset by a shift in the relative mix of products sold. The company’s food basket pricing to stores increased by 0.7% during the second quarter of 2024 compared to the same period in 2023.

U.S. franchise advertising revenues saw growth due to higher same store sales, the return to the standard 6.0% advertising contribution rate (up from a temporary 5.75% rate in Q2 2023), and net store growth. Similarly, U.S. franchise royalties and fees increased as a result of higher same store sales and net store growth.

The company’s international business faced some challenges, particularly with its master franchisee Domino’s Pizza Enterprises (DPE). As a result, Domino’s has revised its international store growth expectations, anticipating a shortfall of 175 to 275 stores below its 2024 goal of 925+ net stores in international markets.

To navigate the current challenges and capitalise on growth opportunities, Domino’s has focused on operational efficiency and strategic pricing. The company’s ability to grow net income and EPS at a rate significantly higher than revenue growth suggests successful cost management and operational improvements. Additionally, the company’s focus on driving order count growth across delivery and carryout channels, and across all income cohorts, indicates a strategy aimed at broad-based, sustainable growth.

Section 2: Strategic Initiatives and Developments

Domino’s “Hungry for MORE” Strategy

The company’s performance in Q2 2024 demonstrates the early success of its “Hungry for MORE” strategy. CEO Russell Weiner emphasized that this strategy is “off to a great start, having an immediate impact on sales and profits.” The strategy appears to be particularly effective in driving growth in the U.S. market.

A key aspect of Domino’s strategy is driving U.S. comp performance through profitable order count growth. For the second consecutive quarter, the company achieved positive order counts in both its delivery and carryout businesses, and across all income cohorts. This approach suggests a focus on increasing transaction volume rather than relying solely on price increases.

Pricing and Supply Chain Optimization

The company has been working on improving its supply chain efficiency. The increase in supply chain gross margin by 0.4 percentage points, primarily due to procurement productivity, indicates ongoing efforts to optimize this crucial aspect of the business. However, these gains were partially offset by investments in supply chain labour, suggesting a balanced approach to efficiency and workforce development.

Domino’s implemented a slight increase in food basket pricing to stores, with a 0.7% rise compared to Q2 2023. This modest increase, coupled with higher order volumes, contributed to revenue growth while likely maintaining competitive pricing in the market.

While the company continues to focus on global growth, it has had to recalibrate its international expansion plans. Domino’s is facing challenges with its master franchisee, Domino’s Pizza Enterprises (DPE), leading to a revision of its international store growth expectations. The company now anticipates falling 175 to 275 stores short of its 2024 goal of 925+ net stores in international markets.

Capital Allocation and Shareholder Returns

Domino’s continues to focus on returning value to shareholders. During the first two fiscal quarters of 2024, the company repurchased and retired 56,372 shares of common stock for a total of $25.0 million. Additionally, the board of directors declared a $1.51 per share quarterly dividend, demonstrating a commitment to regular shareholder returns.

Despite near-term challenges, particularly in international markets, Domino’s maintains its long-term guidance for 2024-2028. The company continues to expect 7%+ annual global retail sales growth and 8%+ annual income from operations growth, indicating confidence in its long-term strategy and market position.

Section 3: Future outlook

Domino’s Pizza maintains a cautiously optimistic outlook for the future, as evidenced by its reaffirmed long-term guidance and strategic focus. However, the company has made some adjustments to its near-term expectations, particularly regarding international expansion.

Long-Term Guidance (2024 – 2028): Domino’s continues to express confidence in its long-term prospects. The company reaffirms its expectations for:

• 7%+ Annual global retail sales growth
• 8%+ Annual income from operations growth

These projections suggest that Domino’s anticipates sustained growth in both its top-line sales and operational profitability over the next several years.

Near-Term Store Growth Projections: While maintaining its long-term outlook, Domino’s has revised its near-term store growth expectations:

• Global net store growth of 825 to 925 in 2024
• U.S.: The company continues to expect 175+ net stores annually for 2024 to 2028
• International: Domino’s expects to fall 175 to 275 stores below its 2024 goal of 925+ net stores, primarily due to challenges faced by Domino’s Pizza Enterprises (DPE)

Due to uncertainties surrounding international expansion, particularly with DPE, Domino’s has temporarily suspended its guidance metric of 1,100+ global net stores. The company states it will provide further updates once it has more visibility into the effect on its annual global net store growth numbers.

Given the challenges in international markets, Domino’s appears to be placing increased emphasis on its US operations. The company’s success in driving profitable order count growth across delivery and carryout channels, and across all income cohorts, suggests a strong foundation for continued growth in its home market.

CEO Russell Weiner expressed confidence that the “Hungry for MORE” strategy is resonating with customers and the Domino’s system. This suggests that the company will continue to focus on implementing and refining this strategy to drive future growth.

While not explicitly stated in the provided excerpt, it’s worth noting that Domino’s, like many businesses, will need to navigate ongoing economic uncertainties, including inflationary pressures, labour market challenges, and potential shifts in consumer behaviour.

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