Domino's (DPZ) Stock Down on Q4 Earnings and Revenue Miss

Domino's Pizza, Inc. DPZ reported lower-than-expected fourth-quarter 2018 financial numbers. While earnings missed the Zacks Consensus Estimate after delivering a beat in each of the trailing three quarters, revenues lagged the same for the third straight quarter. The quarterly results fueled investors’ apprehensions leading to share price decline of 9.2% on Feb 21. Moreover, the stock has declined 12.9% against the industry’s 14.1% growth in the past six months.

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.

Domino's Pizza Inc Price, Consensus and EPS Surprise

Domino's Pizza Inc Price, Consensus and EPS Surprise | Domino's Pizza Inc Quote

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.

Zacks Rank & Key Picks

Domino’s carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Brinker International, Inc. EAT, El Pollo Loco Holdings, Inc. LOCO and Darden Restaurants, Inc. DRI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Brinker International has an impressive long-term earnings growth rate of 14.5%.

El Pollo Loco Holdings delivered positive earnings surprise in three of the trailing four quarters, the average beat being of 5.5%.

Darden Restaurants reported better-than-expected earnings in three of the trailing four quarters, the average beat being 4%.