Domino’s’ struggle for long-term growth
Since reinventing its pizza and launching a self-critical add campaign in 2009, Domino’s Pizza, Inc. (NYSE:DPZ) earnings and stock price have soared. More than doubling earnings per share between 2008 and 2012, Domino’s stock price has increased from under $4 in late 2008 to over $60 today.
Despite its extraordinary recent performance, a weak balance sheet and various strategic threats to the company’s continued revenue growth make Domino’s an unattractive investment.
At over $1.5 billion, Domino’s Pizza, Inc. (NYSE:DPZ) long-term debt is more than three times the value of the company’s $478 million in total assets. This places great stress on the company to continue growing revenue in order to service debt.
Confronted with strong competition, shifting consumer preferences and limited opportunities for international growth, Domino’s should be considered a long shot to significantly exceed the revenue growth it requires to service its debt. Indeed, in 2012, Domino’s grew sales by less than 2% while its long-term debt grew by more than 5%.
Domino’s Pizza, Inc. (NYSE:DPZ) faces fierce competition in the pizza industry from both large chains (primarily Pizza Hut and Papa John’s) and countless independent pizza parlors around the world. As pizza is already one of the world’s most popular dishes, unlike Chipotle and Panera, Domino’s will not grow by introducing novice customers to an innovative new product. Rather, Domino’s established competitors will constrain the company’s growth by competing over consumers essential to its growth.
Domino’s Pizza, Inc. (NYSE:DPZ) may also be affected by changing consumer preferences. Fast-food restaurants today must contend with consumers who are increasingly cognizant of the healthfulness of their meals. As its core business is the sale of medium pizzas containing close to 2,000 calories, Domino’s is threatened in a way that neither Chipotle nor Panera are by consumers’ growing health consciousness.
If Domino’s Pizza, Inc. (NYSE:DPZ) hopes to achieve growth by looking abroad, as Chipotle and Panera intend to, it will have to look farther afield than its younger competitors. Domino’s, the world’s largest pizza chain, is the most mature of these three companies and already operates in 70 countries worldwide. Any sizable increase in Domino’s international sales will not come easily, as it already has a strong presence in the accessible international markets to which Chipotle and Panera are now turning.
Panera takes the cake
With impressive historical earnings growth and robust plans for future expansion, Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera offer enticing investment opportunities. As a significantly cheaper stock with much of the same upside as Chipotle, Panera Bread Co (NASDAQ:PNRA) is a wise choice for an investor interested in the restaurant industry.
The article These Restaurant Companies Offer Stable Growth Amidst Market Turmoil originally appeared on Fool.com and is written by Colin Tweel.
Colin Tweel has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald’s, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald’s, and Panera Bread. Colin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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