Domino’s Pizza (NYSE: DPZ) has been working hard to grow its business over the past 2 years, and those efforts are starting to regain traction. The contraction in business caused by the bursting social-distancing bubble had a profound impact on the comps, which has had a similarly profound impact on share prices.
While the Q2 results are mixed, they reveal improving leverage that has the company set up to return to growth by early in fiscal 2024, if not by the end of fiscal 2023. The combination of growing store count and improved margins should lever the company to new business heights, if not the share price.
The share price is up about 40% from 2019’s highs, consistent with the 40% increase in EPS over the same time. Assuming the company can sustain earning growth, the stock price should follow earnings higher.
Domino’s Pizza Has Mixed Quarter, Shares Wobble
Domino’s Pizza had a mixed quarter, and the news sent shares lower immediately after the release. The move appears to be a knee-jerk reaction to the headline, which has revenue down 3.8% compared to last year and 500 basis points weaker than expected. The decline is due in large part to the comps but also to declining volume and pricing adjustments.
The company lowered its market basket pricing to franchisees by 2.4% but could sustain margin improvement despite the reduction. On a retail basis, global sales are up 5.8% on an FXN basis, 4.5% reported, with US comps up 0.1% and International 3.6%.
Store count increased by 197 net or about 5.8% YOY to underpin systemwide sales growth.
The margin news is the best part of the report. The company widened the operating margin and net income margins by mid-to-high single digits and beat the Marketbeat.com consensus on the bottom line. The GAAP $3.08 in EPS is up 9.2% compared to last year, beating the consensus by $0.01 despite the top-line weakness and outpacing retail revenue growth.
The company doesn’t give formal guidance but commented on the effect it was continuing to address US comp store growth through operational improvement and staffing while remaining focused on the International market.
Among the developments that will impact growth over the next few quarters and years is the deal with Uber (NYSE: UBER). That provides access to Uber technology for roughly ⅔s of Domino’s global business.
Domino’s Capital Returns Will Continue In 2023
Domino’s Pizza is not a high-yielding stock but a steady and stable payment with a growth outlook. The company pays about 35% of its earnings and has increased the distribution for 9 years. The Q3 declaration was released with the Q2 report at the previous payout level of $1.21 or 1.25%, with shares near $385.
That is compounded by share repurchases which amount to 0.67% of the market cap for the quarter. The company has about $289 million left under the current authorization, worth about 2.10% of the pre-release market cap. The company is net debt but managing its position with little changes to the balance sheet over the past year.
Analysts like the stock and have it pegged at a firm Hold that has been steady for over 12 months. That is compounded by a rising price target, up 5.6% since the Q1 earnings release, and likely to rise again now that Q2 results are in.
Marketbeat did not pick up any new revisions immediately after the release, but the trend ahead of the report was bullish. There are 11 updates in July, including 11 price target increases and 1 upgrade to Buy. They see the stock trading 4.5% to 20% above the current action and at a level that could trigger a reversal in the market.
The Technical Outlook: Dominos Pizza Is On The Brink Of Reversal
The price action in DPZ shares was mixed immediately after the report, but the dip was quickly bought. The stock is indicated to open about 2.0% above its pre-release price and could continue higher. If the market follows through on the signal, the next target for significant resistance is $400 to $425.
If the market can get above there, it should continue to drift higher through the end of the year. If not, Domino’s Pizza could remain range bound at current or lower levels.