Domino's Pizza (NYSE:DPZ) shareholders were treated to an unusually strong earnings report recently when the pizza delivery giant announced surging demand during the early days of the pandemic. A growing base of existing customers and new fans turned to the company at a time when many restaurants were closing or scaling back operations.
In a conference call with investors following the report, CEO Richard Allison and his team broke down the record growth results and explained why they're bullish about the future even though the industry could have some tough quarters to go through ahead.
Let's look at some highlights.
No discernible drop-off
The accelerated levels of demand we saw during the middle of the second quarter remained elevated through the end of the quarter with no discernible drop-off.
-- CFO Jeffrey Lawrence
The biggest question heading into the report was where demand settled after consumers adjusted to the shock of having their eating out options dramatically curtailed. Sales gains had initially slumped in the first few days of stay-at-home orders but then spiked in April, according to the company's last operating update.
Growth trends remained strong through May and June, though, executives said. Increased order volume and higher spending per order helped push sales up 16% in the core U.S. market. Management credited Domino's focus on value and convenience, along with its robust e-commerce platform. About 75% of sales in the quarter occurred through its digital selling unit.
Smart growth across our markets
Unit economics remained strong in most markets, particularly in the U.S. business, and we will continue to work with our franchisees to responsibly grow their businesses.
Domino's store expansion initiative, which includes penetrating deeper into established markets around the country, continued despite the COVID-19 disruptions. The chain added 40 new stores to its footprint while closing just one in the U.S. market.
Meanwhile, the company isn't taking outsize risks in overbuilding, management said. "Our franchisees did a great job remaining focused on smart growth across our markets," Lawrence explained. That success shows up in restaurant-level metrics like cash-on-cash returns and operating margins, which are both running strong today.
Value and convenience are bringing customers to us
We believe value and convenience are bringing customers to us and we hope it will continue to bring them back.
With unemployment spiking and rivals across the restaurant industry stampeding into the home delivery niche, Domino's is leaning on its value focus to help keep it in its leadership position. Management said investors should see the new chicken wing addition to its $7.99 value menu as a big step in that direction. Wings are a hit for home delivery right now, but the company has so far failed to fully tap into that demand. "Our wings needed to improve," Allison said.
At the same time, Domino's believes quick, contactless service will be a priority for most fast-food fans for the foreseeable future. That's why the chain just rolled out a national "carside" delivery offering for people picking up carryout orders.
As for its expansion plans, customer enthusiasm for its products has bolstered management's confidence in its strategy, which calls for blanketing established markets with even more locations. While those openings pressure sales growth at existing locations, they appear to be raising overall revenue and cutting delivery times –-- all while making it harder for competitors to gain a foothold in any given neighborhood. "Unit growth will continue to be a focus and the higher sales levels that we're experiencing ... make this even more important," Alison said.