I’ve spent a lot of time over the past few months trying to identify companies showing growth even as the Covid-19 pandemic has been having a negative impact on many different sectors of the economy.
One sector taking the full brunt has been the restaurants industry. One company that stood out among this sector due to its performance was Domino’s Pizza, Inc (DPZ, Financial), which perhaps isnt't too surprising, as demand for pizza delivery was already high before the pandemic.
Domino’s had a solid first quarter, but followed that up with an incredibly strong showing in the second quarter. Though the stock is expensive compared to its own history, Domino’s results could indicate that the stock is worth the price.
Quarterly highlights
Domino’s reported its second quarter earnings results on July 16. Revenue grew 13.4% year-over-year to $920 million, topping Wall Street analysts’ estimates by $6 million. Earnings per share increased 80 cents (or 37%) to $2.99, which was 74 cents above what the market had expected.
The increase in earnings was due to a variety of factors. A lower effective tax rate due to higher tax benefits on equity-based executive compensation added 32 cents to results, while a lower share count added 14 cents. Higher net interest expense due to higher debt balances was a headwind of 11 cents. The largest contributing factor was improved operation results, which added 45 cents to earnings results.
Same store sales improved 5.7% on a reported basis and 8.1% excluding currency exchange. This compares favorably to last year’s second quarter same sales growth of 5.1% (8.4% excluding constant currency).
U.S. same store sales growth was the real story. U.S. Franchise stores, which amounts to ~94% of total stores for the region, had comparable sales growth of 16%. Company owned U.S. same store sales growth was even better at 16.9%. Overall, comparable sales for the region were up 16.1%. This was the 37th consecutive quarter of positive same store sales and also the strongest results over that period of time.
To show just how impressive these same stores sales were, Domino’s comparable growth for the U.S. region in Q2 2019 was 3%. Same store sales were up just 1.6% in the first quarter of 2020. Sales have greatly improved over the last three months for the company.
Domino’s mix and match items for $5.99 remain a popular pick among consumers. Digital channels, something Domino’s has made a priority before most other quick service restaurants, accounted for almost three-quarters of sales for the second quarter.
To help meet growing demand, Domino’s opened a new supply chain center in South Carolina during the quarter and has plans to open an additional supply chain center in Texas and a thin crust manufacturing facility in New Jersey before the end of 2020.
International stores added 1.3% to same store sales growth when excluding the negative impact of currency exchange. This gives this segment 106 consecutive quarters of comparable sales growth. Areas of strength for this segment included China, Japan and South Korea. Other areas were weaker than usual, including France, Spain, India and New Zealand.
Helping results for the quarter was that less than 600 stores worldwide were temporarily closed due to the Covid-19 pandemic as of early July.
Domino’s continues to expand its footprint, opening a net 39 new stores in the U.S. and a net 45 new international stores during the quarter. The company has opened 859 new stores over the past year. This gives Domino’s more than 17,000 stores spread out over 90 different markets.
Domino’s distributed $30 million to shareholders in the form of dividends during the quarter, but has not repurchased any shares since the beginning of January. The company paused its share repurchases last quarter in anticipation of the unknown impact of Covid-19 on results. Domino’s has $327 million, or a little more than 2% of its current market capitalization, remaining on its share repurchase authorization.
The company ended the quarter with its balance sheet in solid shape, in my opinion. Domino’s had current assets of $927 million, including $248 million of cash and equivalents. Current liabilities were just $460 million. Domino’s does have total debt of $4.4 billion, but just $43 million of it is short-term debt.
Final thoughts
Domino’s had a stellar quarter. Top and bottom-line results were both above estimates, with EPS particularly strong even when accounting for a lower share count and a tax benefit. Analysts had targeted a double-digit growth rate for revenue and Domino’s still managed to beat lofty expectations.
Both domestic and international markets experienced yet another quarter of growth, with U.S. same store sales higher by more than 16%.
At $390, shares of Domino’s trades at more than 34 times analysts’ estimates for 2020 (i.e. a forward price-earnings ratio of 34). This is a hefty valuation, but the stock also has a five-year average price-earnings ratio of 30.5.
Double-digit same store sales are likely not sustainable even for a well-run company like Domino’s. However, Domino’s performance in the second quarter speaks to the company’s ability to capitalize on a difficult situation. Companies that do well even under adverse conditions are those likely to excel when conditions normalize, and that makes Domino’s valuation much more palatable for me.
Author disclosure: the author has no position in Domino’s Pizza
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