A month has gone by since the last earnings report for Domino's Pizza (DPZ). Shares have lost about 5.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Domino's Pizza due for a breakout? 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 catalysts.
Domino's Misses Q4 Earnings and Revenue Estimates
Domino's Pizza reported lower-than-expected fourth-quarter 2018 financial numbers. In the quarter under review, adjusted earnings came in at $2.62 per share, which fell short of the Zacks Consensus Estimate of $2.66 but increased 25.4% on a year-over-year basis. The bottom-line improvement was driven by higher net income and lower diluted share count as a result of share repurchases.
Quarterly revenues increased 21.4% year over year to $1,082.1 million but missed the consensus mark of $1,092 million. Moreover, the company adopted new accounting standard in the first quarter of 2018 that resulted in revenues recognition of $112.9 million from domestic franchise advertising. Also, increase domestic franchise revenues, higher supply chain volume, domestic company-owned store and store count growth contributed to revenue growth. These improvements were marginally overshadowed by decline in international franchise royalties and fee revenues.
Comps
Global retail sales (including total sales of franchise and company-owned units) were up 6.5% year over year. This compared unfavorably with 11.7% growth in the year-ago quarter. The uptick can be attributed to solid comps at international stores (up 3.3%) and domestic stores (up 10.2%). Excluding foreign currency impact, global retail sales increased 9.5%.
In the fourth quarter, comps at Domino’s domestic stores (including company-owned and franchise stores) improved 5.6%. This compared favorably with a 4.2% increase in the year-ago quarter.
At domestic company-owned stores, Domino’s experienced 3.6% comps growth year over year, lower than 3.8% registered in the year-ago quarter. Also, domestic franchise stores comps grew 5.7% compared with 4.2% in fourth-quarter 2017.
Comps at international stores, excluding foreign currency translation, were up 2.4%. This was comparatively lower than 2.5% in the year-ago quarter.
Notably, the fourth quarter marked the 31st consecutive quarter of positive U.S. comparable sales and 100th consecutive quarter of positive international comps.
Margins
Domino’s operating margin expanded 670 basis points (bps) year over year to 38.2% in the reported quarter. Sharp increase in operating margin was driven by recognition of US franchise advertising revenues owing to the new accounting guidance. However, the net income margin contracted 20 bps to 10.3%. Moreover, company-owned store margins declined due to increase in both food and labor expenses.
Balance Sheet
As of Dec 30, 2018, cash and cash equivalents totaled $25.4 million, down from $35.8 million as of Dec 31, 2017. Long-term debt at the end of the fourth quarter was $3,495.7 million, up from $3,121.5 million as of Dec 31, 2017. Inventory amounted to $46 million at the end of the fourth quarter.
Cash flows from operating activities summed $394.2 million as of Dec 30, 2018. In 2018, Domino’s has spent $119.9 million on capital expenditures.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
At this time, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Domino's Pizza has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Domino's Pizza Inc (DPZ): Free Stock Analysis Report
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