Why Is Domino's Pizza (DPZ) Down 19.6% Since Last Earnings Report?

A month has gone by since the last earnings report for Domino's Pizza (DPZ). Shares have lost about 19.6% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

Domino's Q4 Earnings and Revenues Beat Estimates

Domino's Pizza reported better-than-expected fourth-quarter 2019 results. Notably, this marked the company’s fourth straight quarter of earnings beat. Both earnings and revenues have improved year over year. The company also reported robust U.S. same-store sales. The fourth quarter also marked the 35th straight quarter of positive U.S. comparable sales and the 104th consecutive quarter of positive international comps.

Domino's robust results can primarily be attributed to solid digital ordering system, robust international expansion and other sales initiatives.

Adjusted earnings in the quarter under review came in at $3.13 per share, which outpaced the Zacks Consensus Estimate of $2.93. The metric also improved 19.5% on a year-over-year basis. The bottom line was driven by higher net income and share repurchase program, which offset higher effective tax rate.

Quarterly revenues improved 6.3% year over year to $1,150.4 million, which surpassed the consensus mark of $1,123 million. Higher supply chain volume, and increase in same-store sales and in-store count both in the United States and international markets drove fourth-quarter revenues. International franchise revenues also increased but were marginally overshadowed by foreign currency headwinds. However, the company recorded lower U.S. company-owned store revenues thanks 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 6.9% year over year in the fourth quarter. This compared favorably with an improvement of 6.5% in the year-ago quarter. The uptick can primarily be attributed to solid comps at international stores (up 7%) and domestic stores (up 6.8%). Excluding foreign currency impact, global retail sales increased 7.6%.

In the fourth quarter, comps at Domino’s domestic stores (including company-owned and franchise stores) improved 3.4%. However, it was lower than the prior-year quarter’s improvement of 5.6%.

At domestic company-owned stores, Domino’s comps grew 3.9% year over year, higher than 3.6% in the year-ago quarter. Moreover, domestic franchise stores comps increased 3.3% compared with growth of 5.7% in the prior-year quarter.

Comps at international stores, excluding foreign currency translation, were up 1.7%. This was lower than improvement of 2.4% in the year-ago quarter.

Margins

Domino’s operating margin expanded 70 basis points (bps) year over year to 38.9% in the reported quarter. Operating margin expansion was driven by rise in supply chain margin owing to the positive impact of procurement savings and lower insurance costs. Moreover, the net income margin expanded 90 bps to 11.2%.

Balance Sheet

As of Dec 29, 2019, cash and cash equivalents totaled $190.6 million, up from $25.4 million as of Dec 30, 2018. Long-term debt at the end of the fourth quarter was $4,071.1 million, up from $3,495.7 million as of Dec 30, 2018. Inventory amounted to $53 million at the end of the fourth quarter.

Cash flows from operating activities totaled $497 million as of Dec 29, 2019. In the quarter under review, Domino’s incurred capital expenditures of $85.6 million.

Share Repurchases

During fourth-quarter 2019, the company repurchased 2,063,378 shares of its common stock for approximately $593.9 million. As of Dec 29, 2019, the company had nearly $406.1 million remaining under current authorization.

Long-term View

Domino’s has reaffirmed two to three-year outlook. The company continues to expect global retail sales growth of 7-10% in the said time period. The company expects same-store sales growth in the range of 2-5%. International same-store sales growth is anticipated to be in the range of 1-4%. The company anticipate global net unit growth in the range of 6-8%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Domino's Pizza has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Domino's Pizza has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.