Investors have had to take sales growth metrics with a grain of salt in recent quarters. Many consumer-facing businesses are reporting higher revenue simply due to price increases, which are offsetting lower sales volumes. McDonald's(NYSE: MCD) endured declining customer traffic this past quarter, for example, yet its comparable-store sales were up 4% in the core U.S. market.
Domino's Pizza(NYSE: DPZ) is growing through other, more impressive means. The pizza delivery leader recently announced a return to revenue gains that were powered by rising sales volumes. Let's take a closer look.
Domino's has hungry customers
Following a tough post-pandemic period, Domino's is on a stronger growth path heading into 2024. Sure, its 2.8% comparable-store sales increase was below McDonald's 4.3% boost in the same period. But while Mickey D's sales trends are slowing down, Domino's growth rate is accelerating. Comps fell 1% in the previous quarter, for context.
The chain is also getting its growth completely from expanding sales volumes, which is easier to maintain than constantly raising prices. Prices are falling for many key ingredients compared to last year's inflation spikes. But Domino's is handling more traffic in both its delivery and carryout segments. "Our positive U.S. transactions and same-store sales growth ... underscore the strength and momentum in our business," CEO Russell Weiner said in a press release.
Tasty finances
Domino's is having no trouble capitalizing on its growth, even though sales trends are modest compared to the pandemic-era demand spikes in 2020 and 2021. Net income expanded at a 15% rate for the full 2023 fiscal year. The chain now isn't far from fully recovering when it comes to operating profit as this metric approaches 19% of sales.
DPZ Operating Margin (TTM) data by YCharts
Look at cash flow and you'll be even more impressed with the latest results. Domino's generated almost $600 million of operating cash this year, up 24% compared to 2022. Gains here allowed management to spend more on advertising while still allocating extra cash toward direct shareholder returns.
Executives just announced a new $1 billion stock buyback authorization that paves the way for more repurchase spending in 2024. Its dividend is jumping 25%, too. The current dividend yield is slightly below average at 1.3%. But it's low partly because of the stock price strength seen over the past year (it's up 52%). Toss in the rising share repurchase spending, and you've got good reasons to expect higher cash returns from this stock in 2024 and beyond.
Domino's price is still a value
Domino's stock valuation is at a 12-month high as of late February, but shares still look cheap. Its price-to-sales (P/S) ratio of 3.6 is below the 5 times sales that investors were paying at the pandemic peak. It's also a big discount compared to McDonald's P/S ratio of 8.5.
Investors have to balance that attractive price against the pizza chain's low, but improving, profit margin and its modest sales growth trends. It will be another few quarters before we know for sure that Domino's has conclusively put its post-pandemic growth hangover behind it.
Yet the hardest part of boosting sales as a fast-food restaurant is winning market share without resorting to profit-busting price cuts. The fact that Domino's is achieving this result through rising sales volumes is a great sign for future shareholder returns.
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Demitri Kalogeropoulos has positions in McDonald's. The Motley Fool has positions in and recommends Domino's Pizza. The Motley Fool has a disclosure policy.
