Mixed 2Q for Domino's Pizza

Domino's Pizza Inc. (DPZ - Analyst Report) reported second quarter 2012 adjusted earnings of 47 cents per share, beating the Zacks Consensus Estimate by a penny. This also compared favorably with the year-ago adjusted earnings of 40 cents. On a reported basis, earnings came in at 47 cents per share compared with 40 cents in the year-ago quarter.

The year-over-year earnings growth was fueled by same-store sales growth (both on national and international fronts), increased international units, higher share repurchase activity and a hike in company-owned margin.

Inside the Headline Numbers

Total revenue dropped 2.3% year over year to $376.1 million and also missed the Zacks Consensus Estimate of $387 million. Revenue was hurt by lower company-owned store revenues, reduced volumes of domestic supply chain and negative impact of foreign currency fluctuations, partially offset by higher domestic and international same-store revenues and international unit growth.

During the quarter, the company’s overall domestic same-store sales moved up 1.7% with company-owned units and franchises rising 0.3% and 1.9%, respectively. Same-store sales grew 5.7% in the international market, signifying the 74th consecutive quarter of same-store sales increase in the region. Global retail sales were up 4.3% or 7.9% (excluding foreign currency impact).

The company’s operating margin expanded 140 basis points (bps) to 30.1% in the reported quarter. The average cheese block price in the second quarter decreased to $1.52 per pound from $1.68 a year ago. The decrease in cheese price, one of the main food ingredients’ of the company, resulted in minor decrease in market basket during the quarter.

Store Count

During the reported quarter, Domino’s opened 8 franchised units and closed 5 franchised stores, bringing the total domestic store count to 4,901.

Internationally, the company opened 120 stores and closed 9 stores. The company currently operates 5,023 international stores.

Liquidity

At the end of the reported quarter, Domino’s Pizza had cash and cash equivalents of $10.8 million with long-term debt (less current portion) of $1,548.6 million.

Share Repurchase

During the reported quarter, the company repurchased and retired 1,146,497 shares for a total cost of around $36.9 million. Subsequent to end of the quarter, the Company repurchased and retired an additional 129,218 shares for a total cost of around $3.7 million.

Outlook

In the long term, management continues to expect domestic same-store sales growth of more than 1%--3% range. On the food cost front, Domino’s expect overall market basket for 2012 to increase 1% to 2% year over year, due to fixed pricing on 35% to 40% of total expected purchases in 2012.

Our Take

Store level statistics of Domino’s Pizza are strong and remains a significant growth driver. Moreover, the company’s growth model does not involve substantial investments as it concentrates on the master franchise structure. Domino’s Pizza remains optimistic about its domestic and international operations with respect to sales and store growth.

Based on strong earnings, same-store sales increase and unit growth, we expect the estimates to go up in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at $1.93 and $2.22, respectively.

Ann Arbor, Michigan-based Domino’s competes with the likes of Papa John's International Inc. (PZZA - Snapshot Report). The company carries a Zacks #3 Rank, implying a short-term Hold rating. We also reiterate our long-term Neutral recommendation on the stock.