Domino's Pizza (DPZ) claimed that its new pizza was tasty enough to spark a turnaround for the franchise. The coming earnings report will show if consumers agree.
In an effort to combat growing criticism of its core product, Domino's gave its pizza a new design. Using what it says are better ingredients and superior recipes, it hoped to heal its reputation for making, well, less-than-tasty fare. The franchise then launched an aggressive advertising campaign to inform the public that it heard the complaints and made improvements.
The plan was risky, as the promotion admitted that the previous pizza was not so great. Nevertheless, the clear improvement in the company's sales in the first quarter of this year suggests that Domino's effort has paid off so far. Same-store sales increased by 14% domestically in the quarter -- a feat largely attributed to the Better Pizza campaign.
A Lingering Aftertaste?
It's also possible that the sales growth was driven primarily by hype. After all, when America's biggest pizza franchise says it's making a huge change, it's not difficult to see how publicity alone would prompt many consumers to try the new pizza. But if they don't see a marked improvement, the campaign-generated sales growth wouldn't be sustainable.
One telling sign will be the earnings release for the second quarter on July 27. Analysts expect Domino's Pizza to report earnings of between 24 cents and 31 cents per share, compared to 21 cents a year ago.
If Domino's reports a number toward the higher end of the range, or beats the estimates outright, it means the company's campaign provided more than just a fleeting boost. The exact details of the report could have hints about the pizza giant's future plans as well.
Expanding the Franchise
In an effort to continue its growth, Domino's has embarked on an international expansion project. Because there are only so many domestic markets, other countries provide the best opportunity for expanding the consumer base. Intense competition within both the fast food and pizza industries means looking to new markets abroad is a necessity.
Still, the strategy isn't without risk. There is no guarantee that the new sites will be successful, even though some analysts believe international locations could outnumber those in the U.S. within a few years. Utilizing the franchise structure and simply licensing new locations might mitigate some risks, but the business could still have issues with international scale. Domino's management will likely offer a glimpse into how these projects have fared thus far when it issues its quarterly report.
Some parts of the actual pizza delivery business could hurt Domino's as well. Prices for some pizza ingredients, such as cheese, have spiked recently. This trend is difficult to gauge, and it could continue indefinitely. Furthermore, a lawsuit is pending against the company, which could end up increasing the amount drivers are paid. Because much of the franchise's business is delivering food, that might increase costs and hurt margins.
Domino's prospects may be a bit hazy, but at least its innovative advertising campaign put the company in the spotlight again. It launched a new promotion, inviting customers to send their own pictures of the pizza for use in commercials and other ads. The Pizza Photo initiative could provide another sizable boost if the public receives it anywhere as well it did the Better Pizza.
For now, Tuesday's earnings report is the first concrete test for Domino's Pizza. A strong showing would be a convincing sign that the ad-driven sales gains hold weight. If not, then Better Pizza didn't make for a better stock.
Introduction to Value Investing
Are you the next Warren Buffett?View Course »