Domino's Dishes Out Solid 3Q

Zacks

Domino's Pizza Inc. (DPZ) reported third quarter 2012 adjusted earnings of 43 cents per share, ahead of the Zacks Consensus Estimate of 41 cents. This also compared favorably with the year-ago adjusted earnings of 35 cents. On a GAAP basis, earnings came in at 44 cents per share compared with 36 cents in the prior-year quarter.

Same-store sales (comps) growth both on national and international fronts, increased international units, share repurchase activity and margin expansion in company-owned stores owing to efficient cost containment led to the beat. However, a stronger dollar partially offset the growth in earnings.

Inside the Headline Numbers

Total revenue nudged up 0.5% year over year to $378.1 million and surpassed the Zacks Consensus Estimate of $371 million. The expansion in revenue was aided by increased comps and international unit growth, partially offset by lower company-owned revenues and negative impact of foreign currency fluctuations.

During the quarter, the company’s overall domestic comps grew 3.3% with company-owned units and franchises rising 0.5% and 3.6%, respectively. However, comps took a higher jump in the overseas market recording a growth of 5.0%, and signifying the 75th successive quarter of international comps increase. Global retail sales were up 4.9% and 8.4% (excluding the effect of foreign currency translation).

The company’s operating margin expanded 200 basis points (bps) to 29.5% in the reported quarter driven by the positive impact of a higher average ticket. The average cheese block price in the third quarter decreased to $1.71 per pound from $2.08 a year ago. The decrease in cheese price, one of the main food ingredients’ of the company, resulted in 2.6% dip in overall commodity basket during the quarter.

Store Count

During the reported quarter, Domino’s opened and closed a respective of 10 and 15 franchised stores, bringing the total domestic store count to 4,896.

Internationally, the company opened 130 and shut down nine stores to bring the tally to a total of 5,144 international units.

Liquidity

At the end of the reported quarter, Domino’s Pizza had cash and cash equivalents of $34.6 million with long-term debt (less current portion) of $1,542.5 million.

Share Repurchase

During the reported quarter, the company bought back and retired 189,718 shares at an average price of $30.85 each. Subsequent to the quarter-end, Domino’s further repurchased an incremental106,573 shares of its common stock at an average price of $34.98 per share.

Our Take

Store level economics of Domino’s Pizza is relatively strong. Its international operations promise significant growth opportunities. Moreover, the company’s growth model does not involve substantial investments as it concentrates on the master franchise structure.

However, sluggish growth in revenue and unfavorable effect on currency translation remain causes of concern.

Ann Arbor, Michigan-based Domino’s which competes with the likes of Papa John's International Inc. (PZZA) currently carries a Zacks #2 Rank, implying a ‘short-term Buy' rating. We reiterate our long-term ‘Neutral’ recommendation on the stock.
 

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