Pick Up Dominoes

Quick, name the best performing stocks over the past five years.  If you cited the usual suspects such as Facebook (FB) Amazon (AMZN) and Apple (AAPL) which had gained 325%, 310% and 85% respectively since 2012 you would be wrong.

But one name that surprises most people when it appears the list is Dominos Pizza (DPZ) which has gained over 560% in the past five years. In fact of large cap names only Netflix (NFLX) and Nvdia (NVDA) with 900% and 1000% gains respectively have done better.

Dominos’ shares recently tumbled some 15% following Q2 earnings report in what can only be called a bout of “sell the news” profit taking as the results handily beat on both the top and bottom line. This is not the beginning of domino of selling, but rather presents a good opportunity to pick up shares on a rare dip.

The fundamentals that have driven the gains remain positive and in place. And the technical picture, while dinged, shows solid support at the $180 level for a very attractive risk/reward entry point with Major support at the 200 dma. 

Dominos and Chill

Among the things Dominos has done right to help propel shares over the past few years:

  • A brilliant turnaround marketing campaign.  A few years ago they acknowledged the fact the pizza was lousy; simply put it tasted like cardboard.  It had relied on convenience and price to sell. But with consumers and competitors such increasingly focused on quality and freshness Dominos competitive edge was becoming stale.

The company went spent the time, money and marketing to improve the quality and expand the product line. It paid off in spades as company not only gained market share but saw the frequency and average ticket price increased helping drive double same store sales and EPS growth.

  • Franchise Model to Drive New Store Openings: In turn the strong EPS growth made Dominos a very attractive franchise to own, which in turned spurred new store opening; the number locations work doubled from 6,200 in 2011 to 14,000 in 2016.

Approximately 97% of the locations are franchised which allows for higher margins whose profits drop to the bottom line.

More than half of the new locations were in emerging markets and now gets a full 50% of its sales from overseas.  The company predicts it can add an additional 5,000 over the next 3-5 years without saturating the market to maintain double digit growth.

  • Early and effective embrace of digital and mobile technology.  Dominos built a proprietary Point of Sale (POS) digital platform and was one of the first chains have a mobile app.  The timing was right to capture the shift not just to mobile but the “stay at home and chill”  trend.  It now nearly 80% of its sales come from online.

Dominos’ has seen its market share climb steadily and now has more than 25% of the pizza delivery market.  It thinks, thanks to its expanded and more stable menu  (fewer limited time items) it can grow its share of overall pizza and delivery market.

All of the above are still firmly in place as evidenced by the Q2 results in which it saw 33% revenue growth, 11.2% same sort sales growth and 18% EPS growth; all above expectations.

So why did shares sell off?  Ostensibly the one kink was lower than expected SSS in overseas, 5.2% vs 8,1% estimates, and the company did not announce a new share buyback.  But basically I think this was simply an execuse to take profits in what has been one of the best performing stocks over the past five years.

LEAPing

Given I like the confluence of the longer term solid fundamentals with the near-term technical support at the $180 level I want to keep my approach fairly simple; I’m buying longer term or LEAP call options.

Namely the January 2019 calls with the 170 strike for $30 per contract.

This option have some $15 of intrinsic value and the time decay will be minimum over the first year. This gives good leverage and plenty of time for the bullish thesis to play out as Dominos resumes its upward trend.

— Steve Smith