The COVID-19 pandemic has altered the way we live, work, and spend our time. Numerous countries have implemented strict lockdowns and social distancing to limit the spread of this persistent virus. More data is being consumed as people work from home and children engage in home-based learning activities, while food delivery has become the norm as restaurants and cafes shut their dine-in areas.
One restaurant chain that has been coping well is Domino's Pizza (DPZ -2.51%). Not many restaurant chains have displayed such impressive growth in revenue and net income over five consecutive years. This makes the company one of the more attractive consumer stocks to consider.
Given the current circumstances, should you still think of accumulating the stock of Domino's Pizza?
Image source: Getty Images.
Limited negative effect of COVID-19
Domino's Pizza operates predominantly on a franchise model, with just a small portion of owned stores in the U.S. International outlets are all operating on the franchise model, and it has shown itself to be hugely successful. Though COVID-19 has necessitated the closure of some of the international outlets, CEO Richard Allison mentioned in the company's latest earnings call that at peak closure, around 2,400 outlets were temporarily shuttered. As of April 21, around 1,750, or 16% of the company's 10,933 international outlets, remain shut. This is a fairly small percentage of total stores, and though it will affect the company negatively in the near term, the hit to net income should be manageable.
In the U.S., fewer than 20 stores are temporarily closed, and the company has shifted to a 100% contactless delivery model. While other restaurant chains may feel stymied by the pandemic, Domino's has an effective take-out and delivery model that it's leveraging on to fulfill orders as more people stay home.
To add to that, the company is hiring another 10,000 workers to handle the increase in order volume, at a time when many businesses are shedding staff. Domino's has traditionally performed well during crises and downturns as more people patronise the company due to its reputation and track record. The company has even done its part to help the community by donating around 10 million slices of pizza in the U.S. to healthcare and hospital workers.
Consistent free cash flow generation
Source: Domino's Pizza 10-K 2015-2019; Author's compilation
Domino's also boasts very consistent free cash flow generation, as shown by the graph above. Though the company has traditionally held very high levels of long-term debt (around $4.1 billion as of March 22), this is due to its franchising model as it taps on debt to grow its presence in international markets. This high level of debt is mitigated by strong and growing free cash flow generation, which should provide investors with peace of mind during this crisis.
A large and growing addressable market
The global pizza industry is worth $141 billion, of which the global quick-service restaurant (QSR) pizza industry takes up $84 billion. Domino's fiscal 2019 total revenue stood at $3.6 billion, which was just 4.3% of the total QSR pizza industry. Besides, the pizza industry is growing at an annual rate of around 3% to 6% internationally, and in the low single digits in the U.S.
These two facts alone illustrate the potential for growth for Domino's. For 2019, the company had a market share of 36% for the pizza delivery market, and 19% for the total QSR pizza market. There is still a large and growing addressable market for Domino's to tap into for many years to come, along with strong potential for the company to increase its market share in what is a fragmented market with many small players.
Dominance wins the day
Consumer habits and patterns may change post-COVID-19, but Domino's should remain relevant. Its dominance within the pizza industry and track record point to continued growth even through this tough period.
Investors should note that the company was not too badly affected by temporary store closures, while evidence of the company hiring more staff points to a surge in orders that may endear even more customers to Domino's brand even after the pandemic is over.
Domino's sounds like it's still a buy, despite its share price rising by 28% year to date.
