Domino's Q3: Beats Estimates as Consumers Still Favoring Lower End Restaurants

| About: Domino's Pizza, (DPZ)

Domino’s Pizza (DPZ), one of the leading pizza delivery chains, recently reported better-than-expected third quarter results. Despite a high-single digit fall in the top-line, the company was able to achieve high-double digit rise in the bottom-line on the back of effective cost control, lower interest expense, and expansion of international stores.

Cost of sales fell 10.3% year on year to $219.6 million due to commodity price deflation and lower delivery costs, offset partially by higher labor expenses. Interest expense dipped 4.5% to $24.5 million due to a lower debt balance. During the quarter, Domino’s repurchased $71.8 million of principal senior notes.

Domino’s quarterly earnings of 17 cents a share, surpassed the Zacks Consensus Estimate of 15 cents, and soared 30.8% from 13 cents posted in the prior-year quarter. On a reported basis, including one-time items, earnings came in at 31 cents a share, up 82.4% from 17 cents delivered in the year-ago quarter.

Despite a rise in net profit, shares of Domino’s fell 10% on Tuesday to close at $8.43 on a steeper-than-expected fall in the top-line. Revenues slipped 6.5% to $302.7 million. Comparable-store sales remained flat in the United Sates but were up 2.7% internationally, the 63rd consecutive quarter growth.

The company’s store-operating profit rose 26.4% to $12.5 million due to lower food, delivery and utility costs. The store-operating margin expanded 450 basis points to 17.2%.

Domino’s and other fast food chain operators like Yum! Brands Inc. (YUM), Burger King Holdings (BKC), McDonald’s Corp. (NYSE:MCD) and Chipotle Mexican Grill (NYSE:CMG) are faring better than casual and upscale dining restaurants, as budget-constrained consumers are trending towards lower-priced dining options.

During the quarter, the company closed 30 net underperforming domestic stores, and opened 43 net new international stores. Domino’s currently operates 8,886 stores in the United States and 60 international markets.

The pizza chain ended the quarter with cash and cash equivalents of $48.7 million, and total long-term debt of $1,620.9 million. The company generated $41.3 million in free cash flow in the first three quarters of 2009.