Domino's Pizza Shows Why Diversity Is Important in Business


Total restaurant industry sales in the U.S. are expected to exceed $660 billion in 2013 -- a 3.8% increase over 2012 according to the National Restaurant Association's 2013 Restaurant Industry Forecast. However, the U.S. economy, though out of recession, is still not at full strength and consumer confidence isn't strong either. As a result, people are looking to cut down spending and this involves less eating at restaurants.

Hence, it's no surprise that this earnings season, three high profile restaurants - Domino's Pizza , Darden Restaurants , and Ruby Tuesday posted lackluster to very weak results.

Domino's, however, has been able to outperform its peers this year. It has also outperformed the S&P 500 whereas Darden and Ruby have been found wanting.

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Domino's continues to grow amid pressure
Domino's's quarterly results have been better than its peers and this reflects in its performance this year. During the latest reported quarter, Domino's's overall domestic comps were up 5.4% with company-owned units and franchises rising 4.6% and 5.5%, respectively.

This was remarkable, especially considering a decline of 3.3% at Darden and an 11.4% drop at Ruby Tuesday. Strong comps resulted in Domino's reporting a 6.9% year-over-year increase in revenue to $404.1 million, slightly ahead of consensus estimates.

Despite an increase in revenue, Domino's faced margin pressures due to an increase in input costs. However, its operating margin expanded 40 basis points to 29.9% in the reported quarter. This expansion was driven by the rise in volumes offsetting higher food costs, and also from a change in the revenue mix.

Domino's's margin expansion is commendable, keeping in view that net commodity costs increased by 1.8%, primarily due to the increase in the cost of cheese. Domino's expects prices to remain flat in 2014 versus 2013. So far, Domino's hasn't declared any plans for price hikes and this is a good thing for consumers going forward.

Moreover, Domino's has a strong international presence with a store count of 5,627 versus 4,939 on the domestic front. This, in a way, makes it less vulnerable to the macroeconomic environment of one country. Its strong international presence offers good growth opportunities going forward.

Lack of diversity pinches Darden and Ruby Tuesday
The advantage of Domino's strong international presence comes to the fore when we see Darden blaming the impact of the Affordable Care Act and faltering consumer confidence for its recent woes. Despite an increase of 6% in revenue from the year-ago period, earnings fell 37%.

Darden has a comparatively weaker presence in international markets. Going forward, it is trying to expand its international presence and has plans to step into Malaysia by collaborating with a local chain known as Secret Recipe, which operates more than 300 units in Malaysia, China, Thailand, Indonesia, Singapore, Philippines, Brunei, Cambodia, India and Australia. Darden however has to face the headwinds of a slower macroeconomic recovery, the adverse impact of the Affordable Care Act, and faltering consumer confidence going into 2014.

Ruby Tuesday, on the other hand, is in shambles as far as quarterly performance goes. There's nothing more that can go wrong with this restaurant. Ruby Tuesday's earnings slipped into the red to a loss of $0.37 per share as compared to a profit of $0.04 per share in the same quarter a year ago.

Ruby Tuesday CEO J.J. Buettgen blamed the faltering economy as the primary reason behind its dismal performance. Ruby Tuesday witnessed a fall of 11.4% in sales at company-owned stores and 8.4% at domestic franchised restaurants. As a result quarterly revenue declined by 11.7% year-over-year to $288.1 million. Going forward, Ruby Tuesday doesn't expect any improvement and expects a high single-digit same-store sales decline in the ongoing quarter.

The takeaway
It is international diversification that has helped Domino's perform remarkably well this year. The company might be facing pressure domestically, along with an increase in input costs, but its presence across various geographies means that it is better prepared to tackle economic downturns. The lack of this diversification has held back the likes of Darden and Ruby, and now both of them are trying to expand internationally.

Thus, if you're going to put your money in a restaurant stock, ensure that it is well-diversified just like Domino's to avoid tepid sales in a particular region.

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Fool contributor Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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