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International Growth and the Pizza Market Dominos goes Global

“Oh Yes We Did!” This buzz phrase sums up consumer shockwaves on Domino’s Pizza (DMZ): their pizza no longer tastes like cardboard!

Domino’s (DMZ) is determined to take “transparency” and retail sales to an all-decade high, hoping to beat out both Pizza Hut (YUM) and Papa John’s (PZZA) – traditionally their biggest competitors. Though Domino’s always beat them on surveys regarding customer loyalty, it sure wasn’t for the sake of the product. (See the PDF “New Investor Day 2012” here.)

It’s easy to be transparent when you have good numbers to share. In 2010, Domino’s experienced a nearly 10% sales increase from the same US stores that either lost money or grew sales at a pathetic rate of 1%. Pizza Hut (YUM) annual sales grew 8% in 2010, and the “emerging markets” portion of Yum International (YRI) grew 50% in operating profit as of February 2012; they aren’t far enough behind for Domino’s to breathe a sigh of relief either domestically or internationally. Domino’s also cracked the online gaming world by developing “Pizza Hero”, understanding that brand name recognition via gaming would increase their 5% mobile and tablet-based sales. $140 million in sales isn’t bad, Domino’s just wanted to cut a bigger swath, via the agile brains of Domino’s leaders such as Russell Weiner (former VP of Pepsi-Cola or “PEP”) and international VP Ritch Allison (former Bain & Company mogul). Since ‘going global’ is the new ‘green’, Domino’s also launched the first ever quick-service restaurant Global Social Media promotion – 50% off pizzas in 17 countries – under the grabby title “Global Domino’s Day”.

What has this recent excitement meant for Domino’s investors?

One, they know that Domino’s former struggling numbers seem to be a thing of the past, even in the Great Recession, because Domino’s has finally combined a good product with great people.

Two, with a talented leader like Ritch Allison helping to increase Domino’s reach internationally, they know that their stock returns have a good chance of jumping up, not just incrementally increasing. The good news is that, since 2008, Domino’s has increased international store coverage by 25% – much more than McDonald’s (MCD), and slightly more than Starbucks (SBUX). The bad news is that Domino’s has trailed both of those competitors for years in market share, so they’re making up for lost time.

Three, it means that Domino’s stock (DMZ) has finally stopped tanking, and started climbing – and looks like it’ll stay up. The last time that Domino’s stock was above $30 was April 2007, there was a steady decline to under $5 by late 2008, then the slow climb back toward the current $33 share price. (See 10 year graph.)

What does this mean for the company?

Even the great increases of 2010 haven’t been a pepperoni frolic through the park. Domino’s may now be calling themselves a “powerful, global brand” but they had to use profits to buyback a great amount of their own stock. In the 3rd quarter of 2011, Domino’s spent nearly $82 million re-buying more than 3.1 million common stocks shares; that was only part of 2011’s campaign to regain control over their stock, which cost the company $129.2 million. (See 2011 3Q call transcript.)

Besides that, it seems odd that a company who boasts about “transparency” to its investors seems to hide the last quarter’s conference call; the only free transcript seems to be held on Domino’s own website in PDF format. That might be due to their less-than-stellar sales numbers (only 3% same-store growth instead of 2010’s benchmark 11.7%). It might be the embarrassing US store numbers. Global sales and international stores make up 50% of Domino’s as a company, while bringing in 36% of the operating income. In essence, Domino’s has to continue expanding globally beyond their 1,633 new stores (from 2006-2011), knowing those stores won’t be as immediately profitable as domestic stores. Domino’s doesn’t have much choice if it wants to continue the profit trend. With 3Q global sales increases of 25% from the international stores, balanced against 3% domestic sales growth, the international stores just might close the gap soon – even with foreign currency exchange rates taking a 3% bite out of profits. Taste tests can’t counteract weak economies, resulting in budget-conscious families refusing to eat out via QSRs (quick-service restaurants). Domino’s still has a long road to climb to gain international market share; even with 1,633 new stores, from 2005 – 2011 Domino’s grew from 1% to 1.8% pizza market penetration.

Then, there’s the ever-present debt monster. Sure, Domino’s is a big company and can handle it – but when total debt amounts to $1.45 billion and 3Q global retail sales only clear $1.6 million – there will be issues…especially since the debt due date is April 2012. There’s no guarantee that another 2010-style ‘bumper crop’ of profits is coming down the pike; it’s entirely possible that social media innovations will remain at the level of “fun Facebook game” and never amount to product sales. Prestigious awards, such as the “Chain of the Year” in May 2011 (Pizza Today) are lovely, but rather like the CFO getting a plaque – one wonders if it will ever translate into greenbacks. More reassuring is the #1 ranking spot in Forbes’ “Top Franchises for the Money”. Advertised correctly, that might generate new interest in future franchisees – they’d like to make some money this year.

Looking ahead, a few of the US-based franchisees might consider moving their business life to Australia, India or Malaysia – those stores have better growth patterns and more profit.