9 Oct

Domino’s Stock Bounced Back despite Weak Q3

WRITTEN BY Amit Singh

Domino’s Pizza (DPZ) reported a disappointing third-quarter financial performance on Tuesday. The stock opened lower due to the weaker-than-expected quarterly performance. However, Domino’s stock pared the initial losses and closed about 5% higher. The change in the stock was a surprise. The company also had a disappointing same-store-sales performance.

Notably, Domino’s missed analysts’ revenue estimate for the fifth consecutive quarter. Meanwhile, the earnings growth showed steep moderation. The earnings growth was below analysts’ expectations.

What could boost Domino’s stock?

While the company’s third-quarter performance wasn’t encouraging, its new $1 billion share repurchases program lifted investors’ sentiment. Domino’s bottom line will likely benefit from share buybacks, which we witnessed in the past several quarters.

Domino’s also lowered its G&A expense outlook, which will likely support the bottom line. The company expects to report G&A expenses of $380 million–$385 million in 2019. Previously, Domino’s expected the G&A expenses to be $390 million–$395 million.

The company’s same-store sales lagged the estimates. However, investors looked beyond the weakness. The company’s same-store sales improved YoY (year-over-year) despite tough comparisons. Domino’s third-quarter same-store sales rose 2.4% in the US. Notably, the company’s same-store sales in the US grew 6.3% in the third quarter of 2018. The same-store sales in the international division rose 1.7% on top of 3.3% growth it registered in the previous year.

What’s in the offing?

So far this year, Domino’s stock has risen 2.2%, which includes yesterday’s gain. The stock underperformed its peers and broader markets by a wide margin. Papa John’s (PZZA) shares fell about 4% on Tuesday following Domino’s lower-than-expected quarterly performance. The overall weakness in the broader markets following China’s news also pressured Papa John’s stock.

Despite the decline, Papa John’s and Yum! Brands (YUM) stocks have risen 30.2% and 22.5%, respectively, on a year-to-date basis. Meanwhile, the S&P 500 has risen 15.4%.

We think that more competition in the quick service delivery segment could continue to impact Domino’s sales growth. However, the expanded store base and fast-delivery could continue to support the company’s sales.

The company’s bottom line will likely benefit from improved comps, margin expansion, and share repurchases. However, the higher tax rate could limit the EPS growth rate.

A few analysts increased the target price on Domino’s stock. Cowen increased the target price to $295 from $260. Meanwhile, J.P. Morgan raised the target price to $275 from 265. Analysts have a consensus target price of $282.09 on Domino’s stock, which implies a potential upside of 11.3% based on its closing price of $253.48 on Tuesday.

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