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Why it may not be too late to buy Domino’s Pizza Enterprises Ltd. (ASX:DMP)

In the last 10 years, shareholders of Domino’s Pizza Enterprises Ltd. (ASX:DMP) have earned a whopping 1250% return, excluding the dividends they received, compared to the ASX which returned just 78% during the same period.

What was the reason for this exceptional return? In one word: growth.

Domino’s grew its earnings per share by an average of 25.2% and its earnings sky rocked from just 16 million dollars per year to 133.6 million last year. The company has continued to add stores to its network both organically and through its franchisee model. Domino’s has also increased comparable store sales markedly over the last decade. This is crucial in the food business, as operating leverage is responsible for generating a significant proportion of profits.

Think of it this way: restaurants have significant fixed costs. This includes their property leases, staff wages and utility bills. However, as the amount of food sold increases, these costs do not increase. The only costs that rise are those which are spent making the food itself. For a restaurant operator driving same store sales is a key component of long-term success. Domino’s has capitalized perfectly on their operating leverage. Same store sales are up an amazing 23% this financial year and the launch of additional menu items such as thick shakes, has increased the per customer spend significantly which leaves huge space for the company to drive further profits to its bottom line.

Domino’s has also mastered its own supply chain and runs a very tight ship. It is able to ship pizza faster and more efficiently than all of its competitors. The company has also leveraged technology and mobile apps to speed up the ordering process for its clients. Apps have reduced their expenses significantly, while actually improving customer satisfaction stores simultaneously.

Domino’s tremendous success has lead them to acquire “Hallo Pizza” a chain of 170 pizza stores in Germany. They have made this acquisition as part of a strategy to conquer the European pizza market. Domino’s also believes that they can implement best practices to the German food chain and leverage the expertise which they have acquired in the Australian market, to leverage growth on a far larger network scale. To support the companies roll-out, they are also spending big on advertising and reinventing the ‘traditional’ pizza menu, plagued by a lack of innovation in Europe.

Then why has the stock declined so much recently?

Since its peak stock price of around $75 per share in 2016, Dominos stock has declined to around $43 per share at the time of writing. This decline has not taken place as a result of worsening business fundamentals, the expectations for the company simply became too outsized and it was impossible for them to meet the extremely high expectations of many brokers. The recent decline in the share price, while still slightly on the expensive side, represents an attractive investment opportunity compared to most other companies on the ASX.

Foolish Takeaway:

I recommend waiting to see if shares dip slightly further and purchasing a stake in Dominos if the stock price declines to $35 or below that.

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Motley Fool contributor mpinto has no position in any of the 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 Scott Phillips.

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