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Domino’s Pizza gaining tech reputation

Shelly Banjo
Bloomberg News

The latest tech company to pique Wall Street’s interests is ... Domino’s Pizza?

These days, almost every company — from Goldman Sachs to Wal-Mart — fancies itself a tech company.

But for the first time in its history, Domino’s is bringing in more sales through smartphones, watches, virtual assistants and other digital channels than from diners walking into stores or phoning in orders. Fifty-five percent of its sales were digital in its latest quarter, compared with 20 percent for the restaurant industry, estimate analysts at Bank of America Merrill Lynch.

Shares in the world’s second-largest pizza chain rose as much as 8 percent Tuesday after it reported a 13 percent increase in U.S. sales in the latest quarter from a year earlier.

The sales gains, while impressive on their own, are even more notable when compared to the restaurant industry’s meager performance. Year-over-year restaurant sales have fallen for five consecutive months, according to data from restaurant research firm MillerPulse. Slow sales and a rash of restaurant bankruptcies have stirred worries of a so-called restaurant recession.

Wall Street has mostly been cautious about Domino’s because of its pricey valuation — it trades at a 55 percent premium to its peers in the Bloomberg Intelligence North American restaurant index. And its stock has gained 54 percent in the past year, compared to the index’s 14 percent decline.

But in the past month, 63 percent of analysts covering the company have raised their price targets, according to Bloomberg’s tally.

As I wrote in August, pizza chains tend to deliver in a restaurant recession — there aren’t many other ways to feed a family on $7.99, the price of a large, 3-topping pie at Domino’s. Plus, as minimum wages rise, pizza chains will take less of a labor-cost hit than other employee-heavy, sit-down restaurants.

Some Wall Street analysts have also started to assign Domino’s tech-like stock-price targets based on the rapid growth of its digital sales.

Domino’s is also asset-light like a tech company. Ninety-seven percent of its 13,000 restaurants are owned by franchisees, so it doesn’t have to spend much on buildings or store upkeep. Instead, it’s using its steady cash flow to invest in better technology and ratchet up dividends and buybacks.

Domino’s has reformulated 80 percent of its menu since 2008 and is entering the second year of a loyalty program that has helped it command 15 percent of all pizza industry sales, up from 9 percent in 2009, according to Bank of America Merrill Lynch estimates.

These turbo-charged sales are also attracting franchisees to build more stores. The company on Tuesday said it could add 1,000 more stores in the coming years.

That growth translates into a steady cash flow for Domino’s in the form of royalties, transaction fees, and other franchisee charges — without the costs of brick-and-mortar stores. Domino’s will have to keep spending on technology and its supply chain to help franchisees. But its structure means it will get a much bigger bang for its buck than its competitors.