Why Domino's Pizza Enterprises Ltd is now a technology stock you should watch

Domino's Pizza Enterprises Ltd (ASX:DMP) has already flagged strong profit growth for 2016 – is it a buy?

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The experience of the last few years has taught Australian and international investors that any business that comes to the market with the description "technology stock" attached is likely to gain more attention than its peers.

Meanwhile, mining, retailing and other more traditional sectors like food services are in the doldrums for various reasons. Well, all except for Domino's Pizza Enterprises Ltd (ASX: DMP). In the last year, the stock is up over 60%, while over a two-year time frame, it has skyrocketed over 200%.

That kind of growth is usually reserved for disruptive tech stocks, not pizza retailers. But there are reasons that investors should think of Domino's as a high growth tech stock, not a defensive food retailer.

Above trend growth

The recent full year results reported by the company showed a significant spike in net profit to $64 million, which was 40% higher than the numbers from the previous corresponding period. This allowed the company to raise dividends by a similar percentage amount to a full year payout of 51.8 cents.

But earnings follow strategy and management initiatives, so what were the drivers behind these stellar numbers?

The Holy Grail

For any retailer, same-store sales growth is the key metric to watch. That is because any retailer can "buy" more total revenues by opening more stores, but far fewer can consistently deliver a product that customers are willing to pay more for, or buy more often.

On this metric, Domino's grew same-store sales in Australia and New Zealand by an astonishing 11.3%. Growth in France was above average, with a figure of 6.4%, while Japan's result in this metric was a disappointing 1.8%.

Digital investments

The strong growth in the Australia and New Zealand market is attributable to two major digital initiatives. The first is the increased digital marketing and product innovation spend that allows pizzas to be ordered with only five clicks from a mobile, tablet or desktop computer. In addition, the menus are fully customisable due to the strong technology back end supporting the online ordering system.

The most important features are that this ordering method and customisation options are both simple and intuitive, and the result of hundreds of hours of product testing from the user experience and design team of the website and app. This means that customers have a positive experience, and are more likely to be repeat purchasers as a result.

The second major driver of sales in this period was the Pizza Mogul initiative. The campaign allows any person to design their own pizza then have it placed on the Domino's online menu. If another customer buys that pizza, then the creator gets a portion of the profits from the sale.

The most successful Pizza Mogul's have earned thousands of dollars of real money simply from designing and marketing pizzas that have connected with the general public. This campaign was incredibly successful because it leveraged the existing social media networks of customers to sell more pizzas to their family and friends.

Store growth

Domino's also plans to increase its market penetration by opening over 200 new stores across its network in the next year. As with everything Domino's in recent years, the expansion is data driven and based on "territory optimisation" so that markets are not left underserved by the Domino's brand.

The takeaway

Domino's is one of those rare companies that is growing  market share through a store rollout at the same time as it is growing organic same store sales. This combination of characteristics has allowed management to guide for 20% net profit growth over the next year, which is something few other listed companies can match.

It is also the kind of profit growth that is more common to a technology company, not a food retailer, and is the reason I am keeping it at the top of my watchlist.

Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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