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Domino's Pizza Inc.’s (DPZ - Analyst Report) second-quarter 2013 adjusted earnings of 57 cents per share beat the Zacks Consensus Estimate of 56 cents by 1.8% and that of the year-ago quarter by 21.3%. Earnings in the quarter received a boost from the company’s higher top line.

Quarterly revenues increased 10.1% year over year to $414.0 million and surpassed the Zacks Consensus Estimate of $407 million by 1.7%. Higher comparable restaurant sales (comps) growth, improved supply-chain as well as royalty revenues and unit expansions pushed up Domino's Pizza’s top line during the quarter.

Inside the Headline Numbers

During the second quarter, Domino's Pizza’s overall domestic comps were up 6.7% with company-owned units and franchises rising 5.7% and 6.8%, respectively. Domestic comps in the quarter were significantly higher than the year-ago level of 1.7%.

In the overseas markets, comps were up 10 basis points (bps) from the prior-year quarter to 5.8%.

Excluding the effect of foreign currency translation, global retail sales (total sales of franchise and company-owned units included) were up 10.4%. Sales were up 9.3% including the foreign currency translation impact. Higher traffic, increasing order count and better menu offerings drove the comps during the quarter.

The company’s operating margin contracted 10 bps to 30.4% in the reported quarter owing to the rise in food costs offsetting the higher volumes.

In the second quarter, the average cheese block price increased 16.4% year over year to $1.77 per pound. With the rise in the cost of cheese, one of the main food ingredients used by the company, the cost of overall commodity basket increased 3.9% during the quarter. Higher cheese price slightly impacted supply-chain margin.

Store Count

During the second quarter, Domino’s Pizza unveiled 20 restaurants while closing 11 stores, thus bringing the domestic store count to a total of 4,932. In the overseas market, the company opened 116 units and shut down 15 stores, resulting in the international store count of 5,508 for the quarter.

Balance Sheet

At the end of the quarter, cash and cash equivalents were $40.8 million as compared with $75.1 million in the first quarter. Long-term debt, less current portion at the end of the second quarter remained flat at $1.5 billion.

Our Take

Domino’s Pizza has been posting solid results for the past few quarters on the back of higher traffic and unit growth. The company’s focus on menu innovation, advertising activities and international expansion are quite encouraging.

However, this Zacks Rank #4 (Sell) company is facing higher food costs which may hurt its margins in the ensuing quarters. Moreover, a feeble macroeconomic environment remains a cause of concern.

Some other players in the restaurant industry which look attractive at the current level include Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report), The Wendy's Company (WEN - Analyst Report) and Burger King Worldwide, Inc. (BKW - Analyst Report). All these companies carry a Zacks Rank #1 (Strong Buy).

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