Domino's Nicely Ahead of Estimates

May. 9.11 | About: Domino's Pizza, (DPZ)

Domino's Pizza Inc. (NYSE:DPZ) reported first quarter 2011 adjusted earnings of 42 cents per share, which blew past the Zacks Consensus Estimate by 8 cents. Comparatively, the company had earned 35 cents in the year-earlier quarter.

The increase can mainly be attributed to higher international royalty revenues, international store growth, lower general and administrative expenses, and low interest expense.

On a GAAP basis, earnings per share were 43 cents in the first quarter of 2011 versus 41 cents in the year-ago quarter. Earnings per share on a reported basis included a one cent gain on the sale of company-owned stores and another one cent gain on its Netherlands operations.

Total revenue increased 2.1% year over year to $389.2 million, comfortably surpassing the Zacks Consensus Estimate of $381.0 million. The growth was mainly driven by higher international revenues and the positive impact of changes in foreign currency exchange rates, partially offset by lower domestic same store sales and lower revenues due to the sale of 26 company-owned stores to a current franchisee.

During the quarter, the company’s overall domestic same-store sales dipped 1.4% with company-owned units and franchises decreasing 2.3% and 1.3%, respectively, due to tough year-over-year comparisons. The company had experienced 14.3% domestic same-store sales growth in the comparable quarter of the last year.

Same-store sales growth in the international market was 8.3%. Global retail sales were up 8.2% or up 6.2% excluding foreign currency impact, with international stores registering a robust 20.1% growth and domestic stores falling 1.0%.

The operating margin at Domino’s expanded 40 basis points to 28.7% in the reported quarter, as cost of sales declined by the same basis points to 71.3%. However, company-owned store operating margin decreased slightly year over year, mainly due to commodity price inflation including cheese and meat partly offset by lower average labor rates.

Store Count

During the first quarter, Domino’s opened 9 and closed 28 domestic franchise stores. Domino’s also transformed 26 of its company-owned restaurants to franchised, bringing the total number to 4,909.

At quarter end, the company had 454 company-owned restaurants in the domestic market with 1 closing during the quarter. International store count was 4,470 with 69 openings and 21 closings.

Domino’s Pizza remains optimistic on its international operations both in terms of sales and store growth In this context, the company remains committed to opening 10,000 stores worldwide.


At quarter end, Domino’s Pizza had cash and cash equivalents of $92.6 million with long-term debt of $1,451.1 million.

During the quarter, the company repurchased and retired 357,605 shares for a total of $5.8 million.

Our Take

With the economy showing signs of improvement, we believe Domino’s will be able to maintain improved earnings momentum. Domino’s Pizza’s store level economics are strong and are driving its store growth. The company has grown in large markets, like the UK where many of its competitors have struggled.

Moreover, the company’s growth model does not involve substantial investments as it used the master franchise. Management expects to operate the rest of the year with promotional activities and improving levels of execution by corporate and franchise stores. We expect estimates to go up in the coming days based on better-than-expected first quarter results.

One of Domino’s primary competitors, Brinker International Inc. (NYSE:EAT) reported third quarter 2011 adjusted earnings per share of 47 cents, surpassing the Zacks Consensus Estimate by 2 cents. Brinker’s revenue also topped our estimates.

Domino’s holds a Zacks #3 Rank, implying a short-term Hold rating on the stock. We also reiterate our long-term Neutral recommendation on the stock.