Domino’s Pizza: Long-Term Prospects Remain Strong (NYSE:DPZ)

Written by Nick Ackerman.

Domino’s pizza (New York Stock Exchange: DPZ) It presented its most recent quarterly results, and they were mixed. The second quarter beat EPS estimates but missed on revenue. The loss was not particularly large, but it showed a decline from last year of 3.8%. On the contrary, it was EPS An annual increase of 9.2%.

They attributed the revenue decline during the quarter to “primarily due to lower supply chain revenues attributable to lower company market basket prices to stores, as well as lower order volumes.”

Although order volumes declined, actual same-store sales improved. Same store sales in the United States were very weak, with growth of only 0.1%. However, international same-store sales made some weight here, with a 3.6% increase.

To generate higher diluted profitability last year, more than 9% came from gross margin expansion. A year ago, gross margin came in lower in the second quarter By 36.3% compared to the gross profit margin in the second quarter of this year, which amounted to 39.5%. Total cost of sales decreased from 63.7% to 60.5% in the same period. Additionally, share repurchases helped add $0.07 due to the lower weighted average number of diluted shares. They are very active in buying back shares, which is nothing new.

Share buybacks are not the only way DPZ returns capital to shareholders. They also have an impressive earnings growth record. They have been increasing their dividends consecutively over the past 10 years at an incredible 10-year CAGR of 27.72%. The 3-year CAGR is more modest at 17.33%, but still incredibly impressive.

One of the main areas of concern for the free zone is its large debt pile of $5 billion. Instead of continuing with buybacks, I was curious to see if they would take that cash and pay off the debt instead. However, interest expense decreased primarily due to higher interest income on cash equivalents.

So far, this means their debt pile hasn’t been a headwind this past quarter despite their massive debt pile. This will be thanks to the tiered vesting schedule and fixed rates that have been locked in. This is something we discussed in our previous update, it’s something to keep an eye on but it generates enough free cash flow to not have to refinance all the outstanding debt at higher rates now.

In fact, when talking about free cash flow, the company’s free cash flow over the last quarter improved significantly. In the last two fiscal quarters, free cash flow amounted to $204,311 million compared to $120,751 million in the same period last year. Some higher capital expenditures offset what could have been higher gains.

FCF in Q1 was $95.651 million, meaning this most recent quarter was $108.66 million. In a quarterly sense, we saw an increase in free cash flow of 13.6%.

They have opened another 197 stores globally increasing the total number as of June 18, 2023 to 20,205 stores. For the subsequent four quarters, they saw 911 net store openings, most of them coming from international store openings of 795.

Growth in the US is not at a standstill with a total of 116 franchise store openings, but it is certainly clear that store opening growth will continue to be driven by the international market as the US market becomes mostly saturated.

evaluation

One of the biggest problems with DPZ right now is that it has risen significantly heading into this earnings report. It has gone from being undervalued relative to its long-term history to being close to its fair value range. At the same time, future growth is expected to slow compared to the past decade or so; That was incredibly impressive. Combine that with the expectation that interest rates on their debt will rise and the fair value range could decline due to these factors. In other words, the fair value range may be a bit optimistic at the moment due to high growth in the past.

The catalyst to push the stock significantly higher was a deal with Uber Technologies (Uber) Ro Providing a new way for consumers to order pizza. However, instead of relying on third-party drivers, DPZ franchised store employees will continue to make deliveries.

Orders placed on the Uber Eats platform will be delivered by uniformed Domino’s drivers. Uber One and Postmites Unlimited members will receive no-charge delivery on their Domino’s orders within the Uber Eats and Postmites platforms.

This means that they still control the manufacturing and finishing processes. They will likely gain additional visibility from users who use these apps. The benefit to subscribing consumers is that they can now order free delivery. In general, I do not see any negative in such an arrangement. At the same time, I’m not necessarily optimistic about the upside as some investors seem to have shown enthusiasm to push the stock to current levels.

Since our last update, which was fairly recent, performance has been impressive. I would still give DPZ a “buy” rating in the long term. A more tactical or short-term investor would likely be more cautious at these levels.

He looks forward

Missing quarterly estimates are nothing too new for the DPZ. They actually missed nine out of 16 quarterly estimates. Their EPS gains are similarly spotty, with misses in seven out of the past 16 quarters. Looking ahead, earnings estimate revisions have been declining over the past six months, but more recently, revisions have been slowly rising in the past month and the past three months.

Although growth has slowed, it is by no means a dead company. Revenues are constantly rising, and analysts believe they will continue in the coming years as well.

On the other hand, the company struggled last year to generate profits and is not expected to reach the EPS peak it achieved in 2021 this year. This has been a pandemic dear, and in the price chart, we can see investors actually pushing the stock higher. Although analysts expect the company to top those results in 2024 and produce new record earnings as well as revenue.

Given the outlook for some more modest growth, earnings growth is also expected to slow. The most recent increase saw a 10% increase when they raised it from $1.10 to $1.21, which was a material slowdown from the previous boosts. The payout ratio is only about 36.3% based on this year’s earnings, which are now “half-baked” with EPS of $6.01 in the first half. Historically, fourth-quarter results have been the biggest contributor to annual EPS numbers over the past six years — meaning $13.34 is quite achievable this year.

I feel it’s ultimately a wise move given sluggish earnings and rising interest rates. Setting aside more cash to ideally pay down debt or even buy back stocks can make them more resilient during this uncertain period. And by their comment in the latest earnings report, they are comfortable with their current debt levels, so it looks like share buybacks will continue.

Finally, modernize the capital structure. A debt leverage ratio of 4 times to 6 times is the appropriate leverage for our company and moves within a range depending on the level of interest rates. We have been working with this range of leverage for almost 20 years. In today’s interest rate environment, you should expect us to use our free cash flow to make investments to grow the business and generate strong shareholder returns through dividends, stock repurchase strategies and debt repayments when it is in the best interest of our shareholders. to do that. As always, we will seize opportunities if credit markets justify further borrowing or refinancing.

Conclusion

Growth is expected to continue into the future, and earnings should reach new highs in 2024. The last quarter may have been mixed in terms of what analysts expected, but mixed earnings are quite normal for the DPZ historically. DPZ shares have risen meaningfully since our last update due to Uber’s announcement. This will likely only add positives, but at the same time, there seems to be a lot of enthusiasm causing the stock to rise significantly in a short time. Caution may be warranted in the short term, but I still believe that the DPZ can deliver results in the long term.