Domino's (DPZ) Q3 Earnings Beat, Stock Slips on Sales Miss

Domino's Pizza, Inc. DPZ reported mixed quarterly numbers for third-quarter 2018, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. The results fueled investors’ apprehensions leading to share price decline of 6% in the pre-market trading. However, in a year’s time, the stock has rallied 43.2% compared with the industry’s 6% growth.

Adjusted earnings of $1.95 per share outpaced the consensus mark of $1.73 and increased 53.5% on a year-over-year basis. The bottom-line improvement was driven by higher net income and lower diluted share count as a result of share repurchases.

Quarterly revenues increased 22.1% year over year to $786 million but missed the consensus mark of $790 million. Moreover, the company adopted new accounting standard in the third quarter that resulted in revenues recognition of $82.5 million from domestic franchise advertising. Also, increase domestic franchise revenues, domestic Company-owned store, international franchise revenues and store count growth contributed to  revenue growth.

Comps

Global retail sales (including total sales of franchise and company-owned units) were up 8.3% year over year. This compared unfavorably with 14.5% growth in the year-ago quarter. The uptick can be attributed to solid comps at international stores (up 5.7%) and domestic stores (up 11%). Excluding foreign currency impact, global retail sales increased 10.4%.

In the third quarter, comps at Domino’s domestic stores (including company-owned and franchise stores) improved 6.3%. This compared unfavorably with an 8.4% growth in the year-ago quarter.

At domestic company-owned stores, Domino’s experienced year-over-year comps growth of 4.9%, lower than 8.4% in the year-ago quarter. Also, domestic franchise stores comps grew 6.4% compared with 8.4% in third-quarter 2017.

Comps at international stores, excluding foreign currency translation, were up 3.3%. This was comparatively lower than 5.5% in the year-ago quarter.
Notably, the third quarter marked the 30th consecutive quarter of positive U.S. comparable sales and 99th consecutive quarter of positive international comps.

Domino's Pizza Inc Price, Consensus and EPS Surprise

Domino's Pizza Inc Price, Consensus and EPS Surprise | Domino's Pizza Inc Quote

Margins

Domino’s operating margin expanded 680 bps year over year to 37.6% in the reported quarter. However, the net income margin contracted 190 bps to 10.7%. The uptick in the company’s net income was primarily driven by an increase in higher supply chain volumes, global royalty revenues and lower tax rates.

Balance Sheet

As of Sep 9, 2018, cash and cash equivalents totaled $84.6 million, up from $35.8 million as of Dec 31, 2017. Long-term debt at the end of the third quarter was $3,437.6 million, up from $3,121.5 million as of Dec 31, 2017. Inventory amounted to $41.4 million at the end of the quarter.

Cash flows from operating activities summed $262.5 million as of Sep 9, 2018. During the first three quarter of 2018, Domino’s has spent $65.1 million on capital expenditures.

Domino’s carries a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked stocks in the same space include BJ's Restaurants, Inc. BJRI, Dine Brands Global, Inc. DIN and Darden Restaurants, Inc. DRI. While BJ's Restaurants and Dine Brands Global sport a Zacks Rank #1 (Strong Buy), Dine Brands has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BJ's Restaurants has an impressive long-term earnings growth rate of 15.3%.

Dine Brands Global delivered positive earnings surprise in each of the trailing four quarters.

Darden Restaurants reported better-than-expected earnings over the preceding four quarters, with an average of 5.1%.

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