Will Domino’s Q2 Results Outperform Analysts’ Expectations?


Jul. 9 2019, Updated 2:11 p.m. ET

Analysts’ expectations

Domino’s Q2 results are scheduled to be released before the market opens on July 16. Analysts expect Domino’s revenue and EPS to rise in the second quarter.

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Expectations for Domino’s Q2 results

Analysts expect Domino’s Pizza to report revenue of $836.9 million in the second quarter, which represents an increase of 7.4% from $779.4 million in the corresponding quarter of 2018. The revenue growth would be an improvement from the increase of 6.4% the company reported in the last quarter. The opening of new franchised restaurants, positive SSSG (same-store sales growth), and growth in revenue from the supply chain are likely to drive the company’s revenue. However, some of the increases in revenue are likely to be offset by a decline in the unit count of company-owned restaurants, and an unfavorable currency translation due to the strengthening of the dollar against other major currencies.

By the end of the first quarter, Domino’s Pizza operated 15,722 franchised restaurants, which was 996 restaurants more than the company operated at the end of the second quarter of 2018. The addition of these restaurants and the restaurants opened in the second quarter of 2019 are likely to drive the company’s revenue during the quarter.

To drive its SSSG, Domino’s is focusing on value offerings, the implementation of technological advancements, and increasing the membership of its loyalty program. The company launched a new Piece of the Pie Rewards loyalty program in February, which allowed customers to earn points by sharing photos of any pizza. The new loyalty program is expected to drive traffic. With the growth in the number of restaurants, the company is opening additional supply chain centers to increase its supply capacity and improve its efficiency. The company opened a supply center in New Jersey in the fourth quarter and is also planning to open two more supply centers in South Carolina and Texas. However, the weak sales in some of the large European regions are likely to hurt the company’s SSSG during the quarter.

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By the end of the first quarter of 2019, Domino’s operated 392 company-owned restaurants, which is four units less than the company operated at the end of the second quarter of 2018. Also, in the second quarter, the company announced it agreed to sell 59 company-owned restaurants in New York to franchisees. The decline in the company-owned restaurant count could lower the company’s revenue during the quarter.

EPS growth

In Domino’s Q2 results, analysts expect the company to report adjusted EPS of $2.02, which implies a rise of 9.7% from $1.84 in the corresponding quarter of 2018. The revenue growth, expansion of EBIT margin, and lower number of shares outstanding due to share repurchases could boost the company’s EPS during the quarter. However, some of the increases in EPS are likely to be offset by a higher effective tax rate.

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Analysts are expecting Domino’s EBIT margin to improve from 16.3% in the second quarter of 2018 to 16.8%. The sales leverage from its positive SSSG and the increase in revenue contribution from its higher-margin franchised business are projected to drive the company’s EBIT margin during the quarter. However, the rise in food and labor expenses are likely to offset some of the improvement in EBIT margin.

For Domino’s Q2 results, analysts are projecting the company’s effective tax rate to be at 20.2% compared to 15.4% in the corresponding quarter of 2018. Since the beginning of the third quarter of 2018 to the end of the first quarter of 2019, Domino’s has repurchased ~1.07 million shares for ~$279.2 million. At the end of the first quarter, the company still had $150.6 million under its share repurchase program.

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Stock performance

As of July 8, Domino’s Pizza was trading at $277.21, which represents a rise of 2.6% since the announcement of its first-quarter earnings on April 24. For the quarter, the company had reported revenues of $836.0 million, which was below analysts’ expectation of $849.6 million. The company’s SSSG in both the domestic and international market fell short of analysts’ expectations. The company reported SSSG of 3.9% in the US against analysts’ expectation of 4.2%, while its SSSG in international markets came in at 1.8% falling short of analysts’ expectation of 2.4%. The company’s management had blamed its fortressing strategy and aggressive promotions from third-party aggregators for lower-than-expected SSSG. However, Domino’s reported adjusted EPS of $2.20 for the quarter beating analysts’ expectation of $2.09. The strong first-quarter had led to a rise in the company’s stock price. You can read more about Domino’s first-quarter performance at: How Did Domino’s Pizza Fare in Q1?

Domino’s Pizza has underperformed the broader equity market this year. Year-to-date, the company has returned 11.8%, while the S&P 500 Index and the Consumer Discretionary Select Sector SPDR ETF (XLY) have returned 18.7% and 23.1%, respectively. XLY has invested 7.7% of its holding in restaurant and travel companies. During the same period, Domino’s peers Yum! Brands (YUM) and Papa John’s (PZZA) have returned 19.7% and 15.7%, respectively.

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Valuation multiple

The increase of 11.8% in Domino’s Pizza’s stock price since the beginning of this year has also raised its valuation multiple. As of July 8, the company was trading at a forward PE multiple of 27.2x compared to 26.0x at the beginning of this year. As of July 8, the company was trading at a discount compared to its peers, Yum! Brands and Papa John’s, who were trading at forward PE multiples of 27.3x and 33.4x, respectively.

Also, on the same day, Domino’s was trading at 29.4 times analysts’ 2019 EPS expectation of $9.42 and 25.4 times analysts’ 2020 EPS expectation of $10.93 with its EPS expected to rise by 11.8% in 2019, and 16.0% in 2020.

Analysts’ recommendations

Ahead of Domino’s Q2 results, analysts are favoring a “buy” rating for Domino’s Pizza. 72.7% of the total 22 analysts that cover the stock have given it a “buy” rating, while 27.3% are recommending a “hold” rating. None of the analysts are advocating a “sell” rating. On average, analysts have given DPZ a 12-month price target of $305.6, which implies an upside potential of 10.2% from its stock price of $277.21 as of July 8.

Since Domino’s reported its first-quarter earnings, Guggenheim, Mizuho, J.P. Morgan, and Cowen and Company have all raised their price targets.

  • Guggenheim: from $285 to $313
  • Mizuho: from $300 to $320
  • J.P. Morgan: from $270 to $290
  • Cowen and Company: from $295 to $330

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