When friends tell me to visit McDonald’s Corporation (NYSE:MCD) for lunch, my face turns Grinch-like. If chicken wings are mentioned, a timid smile recalls Buffalo Wild Wings (NASDAQ:BWLD). But, when Domino’s Pizza, Inc. (NYSE:DPZ) is mentioned, my mouth starts to drool. There are no doubts that hamburgers, wings, and pizza are three North American staple foods that have crossed the Rio Grande, the Atlantic Ocean, and more recently, the Pacific Ocean. As satisfying as any of the three may be for investor’s appetite, revenues and dividends have a different story that will be unraveled below.
All that I want for you my son, is to be satisfied
Reporting positive same-store sales is the challenge faced by companies expanding into new markets. Domino’s Pizza, Inc. (NYSE:DPZ) has been able to do so during the last 77 quarters, making a strong statement for investors to flock to the company. The firm has been showing remarkable success at crossing frontiers, while maintaining a sound financial structure through its franchise strategy; evidence of this fact is the company’s presence in most international airports.
This success overseas stems, in part, from its strong brand recognition and franchise strategy. The company has exploited its brand recognition, and even though it has just recently developed a strategy to expand in the East (Japan), prospects are good, mainly because it has demonstrated, over the years, that crossing frontiers would not hurt profits.
However, expansion alone cannot be responsible for Domino’s acceptance in foreign markets. Innovation joined in to give customers a reason to return. Unlike Wild Wings and McDonald’s Corporation (NYSE:MCD), Domino’s has lesser room to refresh its menu. For the same reason, order placement was the focus of improvement. The company has made online ordering one of its mainstays, reducing ordering time and increasing order volumes by 5%. The only new introduction to Domino’s menu has been pan pizza, as a way to stand toe-to-toe with competitors.
Leaving aside macroeconomics, Domino’s Pizza, Inc. (NYSE:DPZ) is risking its financial health by letting debt accumulate; and, although its operating margin remains good when compared to past records and current industry levels, accumulating debt while expanding in new markets is a combination that spells disaster. The situation is only under control thanks to an ever-increasing cash flow. However, debt is leaving its mark by curtailing revenue and EPS growth. Lastly, Domino’s will face a higher operating cost as non-cash compensation increases.
In all, Domino’s Pizza, Inc. (NYSE:DPZ) stands strong. Nevertheless, the train has passed and expected upside is not as good as it used to be. And this is not because the company has made bad investments, but because it has already made its bet and is currently collecting the winnings. Notwithstanding, investors looking for long-term returns are recommended to buy this stock, given its strong market position, its expected annual EPS growth rate of 14%-15%, and its relatively cheap valuation at 28.2 times its earnings, compared to the 29.2x industry average.
Troubles will come and they will pass
Buffalo Wild Wings (NASDAQ:BWLD) has a lot to learn still; the company is young and has a great deal of room for expansion, which has limited itself to North America until now. Offering a great menu and continuous in-store innovations, it is no accident that these restaurants has been able to mix sports-fans and families in the same environment.
Buffalo Wild Wings has achieved a strong brand recognition that has, however, not crossed many international frontiers; the company remains concentrated on doing well and expanding within known ground. Remarkably, expansion has not been limited by macroeconomic contraction. Hence, the company has set several objectives for 2013, including that of reaching 1,000 stores. The franchise strategy has been widely put to use in order to reduce financial exposure with great results, although frontiers were never crossed.
The biggest challenge for Buffalo Wild Wings will be increasing operational costs. Rising chicken prices and wages will put a strain on the company’s revenue. Management has already proved to have the knowledge to confront bad weather by expanding operations successfully against economic uncertainty. So, the remaining challenge is to replicate past experiences: maintaining low debt levels without hurting cash inflow.
