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Domino’s Pizza Posts Earnings Beat, Stock Falls Anyway

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Today, Domino’s Pizza (NYSE:DPZ) reported its first-quarter earnings. For the quarter, the company reported a diluted EPS of $3.07 on revenues of $873.1 million. The company beat analysts’ revenue and EPS expectations of $868.7 million and $2.32, respectively. Despite the strong performance, the company was trading 3.7% down at 9:37 AM ET today.

Domino’s Pizza’s revenue growth

Domino’s Pizza’s revenue rose 4.4% from $836.0 million in the first quarter of 2019 to $873.1 million. Positive SSSG (same-store sales growth) in both the US and international markets, the addition of new franchised restaurants in trailing four quarters, and growth in the supply chain revenue drove the company’s revenue.

In the US, Domino’s Pizza reported an SSSG of 1.6% with its company-owned restaurants reporting an SSSG of 3.9%, while franchised restaurants reported an SSSG of 1.5%. In the international markets, the company’s SSSG came in at 1.5%. Domino’s net added 1,022 franchised restaurants in the trailing four quarters to increase its overall franchised restaurant count to 16,744 units. However, during the same period, the unit count of company-owned restaurants fell by 47 units to 345 restaurants. The company sold 59 company-owned restaurants to existing franchisees in the second quarter of 2019. The decline in the number of company-owned restaurants offset some of the revenue growth.

Domino’s Pizza’s EPS growth

For the quarter, Domino’s reported a diluted EPS of $3.07, which represents 39.5% growth from $2.20 in the same quarter last year. The company’s EPS rose due to revenue growth, the improved operating margin, lower general and administrative expenses, benefits from income taxes, and the decline in the number of shares outstanding.

Domino’s operating margin improved from 38.6% to 39%. The increased revenue contribution from higher-margin franchised restaurants boosted the company’s operating margins. Domino’s general and administrative expenses declined to 10.2% of the total sales compared to 10.7% in the first quarter of 2019. Due to higher equity-based compensation, the company’s effective tax was lower compared to the same quarter last year.

During the quarter, Domino’s repurchased 271,064 shares for approximately $79.6 million. In the last four quarters, the company repurchased shares worth $770.5 million. By the end of the quarter, the company had $326.6 million under its share repurchase program. The repurchases caused the company’s diluted share count to fall, which drove the EPS.

Dividends

On April 21, Domino’s board approved a quarterly dividend of $0.78 per share, which represents an annualized payout of $3.12 per share. The dividends will be paid on June 30 to shareholders on record as of June 15. As of April 22, the company’s dividend yield was 0.81%, while its stock price was trading at $383.75.

Outlook

Domino’s Pizza’s management withdrew its two to three-year guidance citing uncertainty in the global economy amid COVID-19. However, for the first four weeks of the second quarter, the company reported a preliminary SSSG of 10.6% for US company-owned restaurants and 6.9% for its franchised restaurants in the US. In international markets, the company stated that its preliminary SSSG has declined by 3.2% during the same period—excluding currency translation.

YTD stock performance

The entire equity market has been feeling the heat amid the COVID-19 outbreak. However, Domino’s Pizza stock continues to rise. The company has returned 30.6% YTD as of April 22. During the same period, the S&P 500 Index has declined by 13.4%. Papa John’s (NASDAQ:PZZA) and Yum! Brands (NYSE:YUM) have returned 10.5% and 13.8%, respectively.

I’m bullish on Domino’s Pizza. Although the Trump administration wants to open the economy, I don’t expect customers to return to restaurants soon. They will rely more on delivery services. Since Domino’s has well-established delivery channels, it could benefit amid COVID-19. Overall, I think that there’s more upside for the stock.

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