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Here’s why I think the Domino’s share price is a buy

To most Australians, the name ‘Domino’s’ needs no introduction.

Over the past decade, Domino’s Pizza Enterprises Ltd. (ASX: DMP) has evolved from a very small operation to become Australia’s largest pizza chain and a massive international enterprise with thousands of restaurants. In fact, it has become the largest franchisee for the Domino’s Pizza brand in the world. Here’s a closer look at the company and why I think Domino’s shares are a buy.

Innovative growth strategy

Most of the company’s growth is now coming from its international operations in Japan, France, Germany, Netherlands, Belgium, Luxembourg, and Denmark. Domino’s is starting to gain strong momentum in Europe following the completion of recent store conversions in Germany. It also has a strong pipeline of new store openings in France.

Domino’s now has more than 2,500 stores world-wide, and it aims to double that to more than 5,000 stores by 2025 to 2030.

Domino’s provides customers with a seamless digital experience, from online ordering through to pizza delivery, and its online sales now account for more than two-thirds of Domino’s business.

Leveraging its online channel and grow through digital innovation such as artificial intelligence (AI) is core to the Domino’s strategy moving forward.

Domino’s is using AI in applications such as its DOM Pizza Checker, which was introduced to stores last year to quality check each order. The app utilises a high-tech camera to analyse and grade pizzas based on correct toppings, type, and temperature.

Solid recent financial performance

For FY19, Domino’s reported revenue growth of 24.4% to $1.44 billion, and underlying net profit rose by 6.1% to $141.2 million. Online sales were up by 18.2% to $1.943 million.

Domino’s underlying earnings per share have grown impressively at a compound annual growth rate of over 22% during the last 10 years.

Domino’s also is currently trading with a fully franked dividend yield of 2.2%.

Last December, Domino’s reiterated its same store sales growth guidance of 3–6% and store growth guidance of 7–9% for the next 3–5 years.

Some challenges ahead

Although Domino’s has established a strong position in the local market via its large network of stores, low prices and technology, there are significantly less barriers to entry compared to online classifieds providers such as SEEK Limited (ASX: SEK) and Ltd (ASX: CAR).

One of Domino’s biggest challenges is the increasingly tight competitive environment in online delivery services from the likes of UberEats, which has compressed margins and impacted revenues.

Both Domino’s Australian and US businesses are showing signs of slowing growth, however to some extent, this is to be expected as the company matures in these markets. With maturity comes more market stability, and there is still plenty of room for faster store growth in the years ahead in other overseas markets.

Foolish takeaway

Although Domino’s shares are priced at a premium, I think there is still potential for its share price to grow further due to its strong global brand, its growing sales and strong pipeline of future stores to open.

The Domino’s share price is still down significantly from its all-time high, however I feel that this does provide a buying opportunity for investors with a long-term outlook that are prepared to be patient and wade through any short-term price fluctuation.

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Motley Fool contributor Phil Harpur owns shares of Limited, Domino's Pizza Enterprises Limited and SEEK Limited. The Motley Fool Australia has recommended Limited, Domino's Pizza Enterprises Limited and SEEK Limited. 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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