Domino's Pizza 1Q Earnings Impress

Domino's Pizza Inc. ( DPZ - Snapshot Report ) reported first-quarter 2013 adjusted earnings of 59 cents per share, outperforming the Zacks Consensus Estimate of 56 cents by 5.4% and that of the year-ago quarter by 25.5%. Higher top-line, share repurchase activity and margin expansion pushed up the earnings during the quarter.

Quarterly revenues climbed 8.6% year over year to $417.6 million and surpassed the Zacks Consensus Estimate of $413 million by 1.1%. The company’s higher comparable restaurant sales (comps) growth, improved supply-chain as well as royalty revenues, increased traffic and unit expansion drove the top-line during the quarter.

Inside the Headline Numbers

Excluding the effect of foreign currency translation, global retail sales (including the total sales of franchise and company-owned units) were up 10.5% while the same was up 9.4% including the foreign currency translation impact.

During the reported quarter, Domino's Pizza’s overall domestic comps were up 6.2% with company-owned units and franchises rising 5.0% and 6.3%, respectively. Comps also took a higher jump in the overseas markets recording a growth of 6.5%.

Higher traffic, increasing global demand, better menu offerings, effective pricing and advertising initiatives boosted the domestic as well as international comps in the first quarter. Further, Domino's Pizza gained from the sales on New Year's Eve and New Year's Day that were not included in the year-ago quarter.

The company’s operating margin expanded 130 basis points (bps) to 31.1% in the reported quarter, driven by the higher volumes, higher company-owned store operating margin and better product-mix which however, was offset by a rise in food costs.

In the first quarter, the average cheese block price increased 9.9% to $1.67 per pound. The rise in cheese price, one of the main food ingredients used by the company, resulted in a 2.5% surge in its overall commodity basket during the quarter. However, it has slightly impacted supply-chain margin.

Store Count

During the first quarter, Domino’s Pizza unveiled 10 restaurants while it closed 15 stores, bringing the total domestic store count to 4,923. Internationally, the company opened 85 units and shut down five stores to bring the tally to a total of 5,407 international units.

Share Repurchase

The company bought back and retired 362,899 shares worth $18 million during the first quarter.

Our Take

Domino’s Pizza’s focus on menu innovation, promotional activities, international expansion and margin expansion are quite encouraging. The company’s store level economics are solid and are driving growth. Nearly 96% of Domino’s Pizza’s restaurants are franchised, which helps it to reduce its capital requirements and facilitate earnings per share growth and ROE expansion. However, the feeble macroeconomic environment and the unfavorable effect of currency translation remain causes of concern.

Domino’s Pizza currently carries a Zacks Rank #2 (Buy). Some other restaurateurs like McDonald’s Corp. ( MCD - Analyst Report ) missed our estimates on both lines this season while Yum! Brands Inc. ( YUM - Analyst Report ) beat earnings but missed out on revenues. Another restaurant chain, The Cheesecake Factory Inc. ( CAKE - Analyst Report ) was ahead of the estimates on both counts.