Shares of Domino’s Pizza, Inc. (DPZ, Financial) are down more than 10% over the last month, with nearly half of this decline occurring since the company reported earnings last week. Some of the numbers were disappointing on a year-over-year basis, likely leading to the drop in the price.
Looking closer, we see that Domino’s actually had a quarter that is very close to its usual strong performance. The decline in share price has made the stock a little more attractive on a valuation basis, which could present a good opportunity for those investors looking for an entry point into the name.
Domino’s reported third-quarter earnings results on Oct. 14. Revenue grew 3.1% to just under $1 billion, but fell $37 million short of Wall Street analysts’ expectations. Global retail sales improved 10%.
Net income of $120.4 million was a 21.5% increase from the prior year, while earnings per share grew 30.1% to $3.24. Earnings per share was also 13 cents above estimates.
After 41 consecutive quarters of U.S. same-store sales growth, Domino’s had a 1.9% decline for the third quarter, which missed consensus estimates of 1.7% growth. However, this number doesn’t tell the whole story as Domino’s had 17.5% growth in the third quarter of 2020 as consumers flocked to the pizza chain's online order system in the midst of the pandemic. Total sales, including new stores, grew 1.1% for the U.S. region.
International remains a bright spot as same-store sales grew 8.8%, marking the 111th consecutive quarter of growth. This also came in above estimates of 7.7% growth. Including new stores, retail sales improved 16.5%.
Higher input costs weren’t much of a factor during the quarter. Costs of sales were 61.4% of total revenues, a 120 basis point decline from the prior year. This has been a theme so far in 2021 as cost of sales as a percentage of revenues has decreased nearly a full percentage point to 60.8% for the first three quarters of the year. With 98% of stores being franchised to individual owners, Domino’s doesn’t worry as much about higher wages, reducing the impact of inflationary pressures.
Domino’s repurchased nearly $80 million worth of stock during the recent quarter. The company has $820 million, or 4.7% of its current market capitalization, remaining on its share repurchase authorization.
According to Wall Street analysts, Domino’s is expected to earn $13.69 per share in 2021, which would be a 14% increase from last year’s levels. Looking further out, growth is expected to remain robust, with analysts projecting earnings per share of $15.46 for 2022. This would be 13% above estimates for the current year.
Takeaways and valuation analysis
While Domino’s 10-year plus streak of same-store sales growth for the U.S. is over, not all is lost. The most recent quarter faced the toughest year-over-year comparison in recent history. The two-year stacked growth streak for this region stands at 15.6%. This small decline year-over-year also shows just how loyal Domino’s customers are, because, if the growth had normalized, the falloff should have been steeper. But it wasn’t, meaning that Domino’s customers that it picked up last year are largely still purchasing from the company. The company also continues to experience excellent results in international markets.
Part of this is due to Domino’s commitment to aggressively adding to its store count. The company added a net 323 stores during the third quarter. Included in this is 278 international stores, which makes sense from a business standpoint given the gains made in these markets.
The company’s store count totaled 18,380 at quarter’s end. Domino’s has added more than 1,100 stores over the last four quarters, resulting in a more than 6% increase in store count since the same period of last year. There are few names in the restaurant industry showing such rapid expansion.
This wide footprint across the globe gives the company a presence not matched by any other direct competitor. Thanks to having stores in more than 90 countries, Domino’s has 17% of the market share of the highly fragmented global quick service restaurant pizza market. This is a significant portion of the estimated $85 billion pizza market. As of the end of 2020, Domino’s had 48% of the U.S. quick service pizza business, including 52% of the carryout market and 37% of the delivery market.
Still, the company doesn’t believe its business has become saturated in the U.S. as it eyes as many as 8,000 total stores eventually. International markets are expected to see even more expansion, where markets such as France, Germany, India, China and Brazil could all see their store count potentially double.
Even better, the company believes that it could add more than 6,500 stores across its top 15 markets without causing sales to cannibalize. In total, Domino’s believes it could have as many as 24,000 total stores around the world. Again, there are few companies in this industry with the potential for the store count growth of Domino’s. This type of expansion is also why global retail sales had a compound annual growth rate of 10% from 2009 through 2020.
With several positive tailwinds and a strong history of producing growth, Domino’s has earned its premium valuation. With shares closing Friday’s trading session at $455, Domino’s has a forward price-earnings ratio of 33.2 when using earnings estimates for the year. According to Value Line, shares have traded with an average price-earnings ratio of 30.3 since 2016 and 26.6 since 2011. The current valuation isn’t too far ahead of its medium-term historical average. The long-term average shows that the market has generally awarded the stock a high valuation even if it is lower than today’s multiple.
The GuruFocus Value chart shows the stock at its most reasonable level in quite some time.
With a GF Value of $453.83, Domino’s has a price-to-GF-Value ratio of 1.04. Looking at the chart above, we can see that the stock hasn’t traded this close to its fair value estimate since late May and early June of this year.
Domino’s has a long track record of growing its business through a combination of strong same-store sales growth and store expansion. The U.S. business did snap its streak of positive same-store sales growth in the most recent quarter, but this follows last year’s highly impressive third quarter, where the region had a nearly 18% increase year-over-year. To drop off less than 2% from the prior year speaks to the wide appeal to customers that Domino’s has. The international business continues to perform quite well and the company is far from reaching maturity in these regions.
As I’ve said before, Domino’s isn’t a cheap stock, but it is high growth name that produces results. I believe investors looking for a name in the quick service restaurant group should consider owning shares of Domino’s for these reasons.