December 16, 2011

A New Recipe For Strong Results at Dominos

by Alpha Now Research Team

During finals week for students, the phone lines at pizza places, large and small, ring constantly. One of the likely beneficiaries of this surge in demand is one of the largest pizza chains in the country, Dominos Pizza Inc (DPZ). However, one good week does not a year of solid profits make. What’s needed is a recipe for cooking up solid earnings year round.

Dominos’ stock price has doubled since the beginning of 2011, signaling investors seem to think highly of the company and its growth prospects. DPZ has a strong StarMine Earnings Quality (EQ) score of 90, which places it the top decile of companies in the region. StarMine assigns a score of 1-100 to companies, with a maximum score of 100 assigned to those companies with earnings that are strong and sustainable in the future. Let’s dig a little deeper into the financial statements to see how the company is performing on some key metrics.

DPZ’s income statement shows that the pizza chain’s operating profit margins (OPM), represented by the blue line in the chart below, have steadily increased since the beginning of 2010. This coincides with the company’s new recipe for its pizza (launched in December 2009) as well as a shakeup in its senior management. Up until the debut of the new pizza recipe, the company’s OPM had been shrinking, but now stands 2.8% above the industry median (gold line), a level that bodes well for the future. The company’s net operating asset turnover also has increased steadily in the last two years. Together, these two measures explain the remarkable improvement in the company’s return on net operating assets; that figure has doubled from 63.1% two years ago to 126.6% in the most recently-reported quarter, an impressive turnaround.

Source: Thomson ONE / StarMine

It is a good sign for companies when their cash flow from operations (CFFO) is positive and exceeds net income. It indicates that that net income is supported by CFFO, and thus is sustainable. In the chart below, the green bars indicate the amount by which the CFFO exceeds the net income at Dominos (red indicates a shortfall). In the last two years, the company has experienced only two quarters when the CFFO fell slightly below net income; all other quarters have seen CFFO exceed net income.

Source: Thomson ONE / StarMine

J. Patrick Doyle, who took over as CEO of DPZ in March 2010, has done a good job of turning the company around and putting it in a strong financial position as it continues to expand internationally, even as it remains popular among the young college-going crowd of pizza aficionados. It remains to be seen whether the company can parlay that strength into a brand that is as strong and popular as McDonalds, and if it is able to sustain its expansion plan. For now, at least, DPZ seems to have found a recipe for success.

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