The Domino's Pizza Enterprises Ltd. (ASX: DMP) share price has soared over 1500% higher over the last 10 years, while the S&P/ASX 200 index has climbed around 70% higher over the period.
Domino's is a $4 billion market cap company that operates retail food outlets and a franchise service. The company is Domino's Pizza Inc. (NYSE: DPZ) largest franchisee outside of the USA. It holds the master franchise rights to the Domino's brand and network in Australia, New Zealand, Belgium, France, The Netherlands, Japan, Germany, and Luxembourg. Over the past decade, the company has returned 1,534%, excluding dividends! That can be partly attributed to the greater than 24% CAGR in underlying earnings over the 10 years to 30 June 2018.
FY18 Earnings
In FY18 Domino's reported stellar results but failed to meet the markets lofty expectations. Free cash flow more than doubled to $120.6 million, whilst revenue grew 7.5% (to $1.154 billion) and underlying EPS grew 14.4% (to 152.8 cents). The company also aggressively bought back stock, with the cancellation of 4,348,366 shares. A strong calendar year 2019 program was announced on 21 December 2018, with 85,537,140 shares available for on-market purchase.
3 factors of Domino's success
The past success of Domino's, as well as the future prosperity, relates to three things: quality ingredients and pizza's; innovation in technology; and a growing store base.
The quality of ingredients has improved significantly over the years. At the current pizza price point, a focus on maintaining quality at a reasonable cost is critical.
In FY18 Domino's added 308 stores to the network, across ANZ, Japan and Europe. From the approximately 2,400 stores current held, the company is targeting 4,650 stores by 2025. Each new profitable store should increase earnings, as economies of scale can be employed.
Domino's was ahead of the curve when it came to the use of technology in pizza making and delivery. In FY18 the company saw a 19.4% increase in online sales. The use of websites and mobile apps has made it easier and more convenient than ever the order exactly what you want, and receive in an acceptable time frame. Domino's continues to innovate in order to drive sales. Some of the latest and upcoming features include an augmented reality pizza chef, improved pizza checker, and Domino's dating.
Foolish Takeaway
With such a strong record of success, Domino's understandably trades at a premium to market multiples. Domino's shares trades on a P/E ratio of 34x earnings compared the market's 16/17x earnings. At current share prices, the company also pays a healthy 2.44% partially franked dividend.
Domino's reports its half-year results next week, on the 20th of February. Given that market expectations can result in big share price swings, I tend to wait for high P/E companies to release major results and make a decision based on the fundamentals. Domino's has a great track record, profitable business model and strong market position. I expect Domino's to release another set of solid results and see it as a long term market beater.
