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Why Is Domino's Pizza (DPZ) Up 11.9% Since Last Earnings Report?

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It has been about a month since the last earnings report for Domino's Pizza (DPZ - Free Report) . Shares have added about 11.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Domino's Pizza due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Domino's Beats on Q3 Earnings, Lowers Long-term View

Domino's Pizza reported mixed third-quarter 2019 financial numbers, wherein earnings surpassed the Zacks Consensus Estimate but revenues came almost in line with the same. Notably, this marked the company’s third straight quarter of earnings beat. However, the company reported disappointing same-store sales. Domino's also lowered its long-term view.

Adjusted earnings in the quarter under review came in at $2.05 per share, which outpaced the Zacks Consensus Estimate of $2.04. The metric also increased 5.1% on a year-over-year basis. The bottom-line improvement was driven by higher net income, overshadowed by a higher effective tax rate.

Quarterly revenues improved 4.4% year over year to $820.8 million, which came almost in line with the consensus mark of $821 million. Higher supply chain volume, increase in same-store sales and in-store count both in the United States and international markets drove the company’s revenues. International franchise revenues also increased but were marginally overshadowed by foreign currency headwinds.

However, the company-owned store revenues declined in the quarter due to the sale of 59 U.S. company-owned stores to existing U.S. franchisees.

Comps

Global retail sales (including total sales of franchise and company-owned units) rose 5.8% year over year in the third quarter. This compared unfavorably with 8.3% growth registered in the year-ago quarter. The uptick can be attributed to solid comps at international stores (up 5.7%) and domestic stores (up 6%). Excluding foreign currency impact, global retail sales increased 7.5%.

In the third quarter, comps at Domino’s domestic stores (including company-owned and franchise stores) improved 2.4%. This compared unfavorably with a 6.3% increase in the year-ago quarter.

At domestic company-owned stores, Domino’s comps grew 1.7% year over year, lower than 4.9% registered in the year-ago quarter. Also, domestic franchise stores comps increased 2.5% compared with a 6.4% rise in third-quarter 2018.

Comps at international stores, excluding foreign currency translation, were up 1.7%. This was comparatively lower than the 3.3% increase recorded in the year-ago quarter.

Notably, the third quarter marked the 34th consecutive quarter of positive U.S. comparable sales and the 103rd consecutive quarter of positive international comps.

Margins

Domino’s operating margin expanded 90 basis points (bps) year over year to 38.5% in the reported quarter. Operating margin expansion was driven by a rise in supply chain margin owing to the positive impact of procurement savings as well as lower insurance costs. Moreover, the net income margin expanded 40 bps to 11%.

Balance Sheet

As of Sep 8, 2019, cash and cash equivalents totaled $66.7 million, up from $25.4 million as of Dec 30, 2018. Long-term debt at the end of the third quarter was $3,407.1 million, down from $3,495.7 million as of Dec 30, 2018. Inventory amounted to $51 million at the end of the third quarter.

Cash flows from operating activities summed $324.6 million as of Sep 8, 2019. In the quarter under review, Domino’s has spent $42.7 million on capital expenditures.

Long-term View

Domino’s has lowered its long-range outlook from three- to five-year to two- to three-year. The company now expects global retail sales growth of 7-10% in two- to three-year period, compared with the prior guidance of 8-12% in three- to five-year period. The company expects same-store sales growth in the range of 2-5% in two- to three-year period compared with earlier guided range of 3-6% in three- to five-year period. International same-store sales growth is anticipated to be in the range of 1-4% in two- to three-year period, lower than the earlier provided range of 3-6% in three- to five-year period.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Domino's Pizza has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Domino's Pizza has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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