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We remain Neutral on restaurant company Domino’s Pizza Inc. (DPZ - Analyst Report). While we have a favorable view of the company’s results in the second quarter of 2013, strong brand positioning in the U.S. pizza delivery segment, a strong overseas presence and traction in digital ordering, a sluggish macro-environment and higher prices for cheese keep us on the sidelines at the current level.

Why the Reiteration?

On Jul 23, 2013, Domino's Pizza’s second-quarter 2013 adjusted earnings of 57 cents per share beat the Zacks Consensus Estimate by 1.8% and the year-ago quarter's earnings by 21.3%. Earnings in the quarter received a boost from the higher top line.

Revenues grew 10.1% year over year mainly bolstered by higher same-store sales, improved supply-chain and royalty revenues as well as unit expansion. Higher traffic, increasing order count and better menu offerings increased comps during the quarter. Revenues also came ahead of the Zacks Consensus Estimate by 1.7%.

Domino’s is the market leader in the pizza delivery segment in the U.S. and ranks second in the carry-out segment. Internationally, it is the second largest pizza delivery service based on the number of units and sales.

Domino’s has an extremely strong exposure in the international market.  Apart from this, investments in technology-driven initiatives like digital ordering have played a major role in driving its sales over the last three years.

However, despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. Both a sluggish macro-environment and higher cheese prices can be a drag on the winning momentum of Domino’s. In fact, the company’s operating margin in the second quarter contracted 10 basis points owing to the rise in food costs, which offset the higher volumes.
Domino's Pizza currently carries a Zacks Rank #2 (Buy). Other players in the restaurant industry, which look attractive at current levels, include The Wendy’s Co. (WEN - Analyst Report), AFC Enterprises Inc. and Burger King Worldwide Inc. (BKW - Analyst Report), all carrying a Zacks Rank #2 (Buy).

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