In a previous article related to Domino's Pizza (DPZ), a collar position was considered as a way to protect a position in case the company's earnings results were not up to par. With the upheaval in Europe associated with sovereign debit, it was conjectured Domino's results might not be as robust as expected. Fortunately, Domino's international performance, with the exception of Greece, was very good. Domino's domestic results were also good and as a result the company's stock price spiked up as shown below:
The collar position considered in the previous article currently has a positive return of 2.7%, and there isn't much time value left in the call option, so either closing the position or rolling the position should be considered.
In the Domino's Q4 2011 earnings conference call held on Tuesday, February 28, 2012, the company had some good things to say, especially with respect to international growth. Domestic U.S. growth associated with addition of new stores over the course of the previous year was not as great as the company expected, primarily due to an unexpected spike in commodity pricess in the neighborhood of 6%. The company expects modest commodity price increases for 2012 in the range of 1% to 2% range.
The company's strategy of closing or moving under performing franchisees to better performing franchisees is paying off with 200 under performing franchisees having left and having been replaced by higher performing franchisees. The company recently released an Android application to go with the Apple (AAPL) iPhone application and have received good reviews for the Android application.
On a negative note, the company indicated availability of financing for smaller franchisees hasn't improved very much and that financing for larger franchisees has improved marginally. On another negative note, the company indicated they expect the dollar to be stronger next year which will have a negative effect with respect to international results. Additionally, plans are in the works for refinancing the company's debt, but specific details related to refinancing the debt could not be provided.
Except for the strong dollar aspect, prospects for the company look positive, so rolling the current collar to another collar in order to generate additional potential return will be considered. Using PowerOptions tools, a replacement collar for Domino's was found with a 2.8% (20.9% annualized) potential return and a maximum potential loss of 8%, even if the price of the stock drops to zero. Specific details for the found position are shown below:
The specific call option to sell is the 2012 Apr 38 at $1.40 and the put option to purchase is the 2012 Apr 34 at $1.05. The existing 2012 Apr 34 call option can be purchased to close for $4.50. Since there's little value left in the original put option, it will be left open.
Including the results for the prior Domino's position, the potential return is about 6% (37% annualized) with a maximum potential loss of 5.6%, even if the price of the stock drops to zero. A profit/loss graph for one contract of the position including the prior position is shown below:
If the price of Domino's stock increases to around $42, the position could potentially be rolled in order to realize additional potential return as was illustrated in this article.