Down 40% in 2022, is Domino’s Pizza Stock a buy?

Dominos Pizzait is (DPZ -4.78%) the stock jumped 10% on Oct. 13 after the pizza chain released its third-quarter earnings report. Its revenue increased 7% year-on-year to $1.07 billion and matched analysts’ expectations. Its worldwide retail sales increased nearly 5% at constant exchange rates, with 2% growth in same-store sales in the United States offsetting its 1.8% decline overseas.

But its adjusted earnings still fell 14% to $2.79 per share, missing analysts’ expectations of $0.19. Investors seemed to gloss over the shortfall and instead focus on accelerating its domestic sales growth, but Domino’s stock still remains down more than 40% for the year. So is it a good time to buy a slice of this leading pizza chain?

Image source: Domino’s Pizza.

Its sales are gradually stabilizing

Domino’s growth accelerated significantly throughout 2020 as many brick-and-mortar restaurants closed during the pandemic. Unlike many of its industry peers, who quickly turned to third-party delivery platforms like DoorDash to overcome this downturn, Domino’s business was already set up to do efficient drop-shipping. It had also invested in expanding its online ordering platform and mobile app over the past few years.

Domino’s growth slowed in 2021 as more restaurants reopened, but it continued to open hundreds of new stores each quarter. However, its domestic same-store sales began to decline in the first half of 2022, prompting bears to argue that Domino’s relied too heavily on new store openings to drive its global retail sales growth. Its international same-store sales also declined in the second and third quarters.

Period

Q3 2022

Q2 2022

Q1 2022

FISCAL YEAR 2021

FISCAL YEAR 2020

U.S. Same Store Sales Growth (YOY)

2%

(2.9%)

(3.6%)

3.5%

11.5%

International comparable store sales growth (YOY)

(1.8%)*

(2.2%)*

1.2%*

8%

4.4%

New store openings

225

233

213

1,204

624

Global Retail Sales Growth* (YOY)

4.7%

1.5%

3.6%

11.7%

10.4%

Data source: Domino’s Pizza. YOY = year after year. *Constant currency.

Domino’s blamed slowing domestic growth in the first half on a shortage of delivery drivers and other workers, inflationary headwinds and tough comparisons with its pandemic-stimulating growth in the previous two years. The rising dollar has also reduced its overseas revenue and prompted it to begin reporting international same-store sales growth this year in constant currency terms.

But in the third quarter, Domino’s nationwide same-store sales rose again, as growth in average ticket size (boosted by its recent price increases) offset a decline in total orders. This recovery offset its decline in international same-store sales, which was largely caused by a difficult year-on-year comparison with a UK value added tax holiday in the third quarter of 2021 which did not happen again this year. Analysts expect Domino’s total revenue to grow 5% this year, then 6% to $4.88 billion in 2023, as year-over-year comparisons finally stabilize.

But its margins continue to decline

Domino’s revenues continue to grow, but its gross margins are squeezed by inflation – and that’s only partially offsetting that pressure with its price increases. As a result, Domino’s adjusted earnings per share (EPS) declined year over year for three consecutive quarters, even after taking into account an increase of $0.08 per share resulting from its buybacks during the last 12 months. The company has also funded some of these buybacks with debt instead of its own free cash flow (FCF), which is an odd move given that its shares have lost around 30% of their value over the past 12 years. month.

Period

Q3 2022

Q2 2022

Q1 2022

FISCAL YEAR 2021

FISCAL YEAR 2020

Gross margin

35.7%

36.3%

36.5%

38.7%

38.7%

EPS growth (YOY)

(13.9%)

(7.8%)

(16.7%)

9.3%

29.6%

Data source: Domino’s Pizza.

The company expects its margins to remain under pressure due to a 13% to 15% increase in food basket prices for the full year. Another major issue is the strength of the dollar, which can only strengthen as interest rates continue to rise. It now expects these currency headwinds to reduce its full-year royalty revenue by about $29 billion to $30 million, down from its previous forecast of $22 million to $26 million. .

Domino’s plans to rein in operating expenses and continue buying back shares to counter that pressure, but analysts still expect its adjusted EPS to fall 8% this year before rebounding 18% in 2023.

The evaluations and the verdict

Domino’s trades at 21 times forward earnings and pays a forward dividend yield of 1.5%. Dad Johnit is (PZZA -6.12%)which is slower growing than Domino’s but faces many of the same challenges, trades at 18 times forward earnings and pays a forward yield of 2.4%. Yum Brands (YUM -2.65%)the parent company of Pizza Hut, KFC and Taco Bell, trades at 20 times forward earnings and pays a forward yield of 2.2%.

Domino’s doesn’t look particularly cheap relative to its peers or its near-term growth rates. Investors should also take analyst estimates for next year with a grain of salt, as we cannot be sure how long inflation, the rising dollar and macroeconomic headwinds will persist. Therefore, investors should not buy a slice of Domino’s until it is much cheaper.

Leo Sun has no position in the stocks mentioned. The Motley Fool holds positions and endorses Domino’s Pizza and DoorDash, Inc. The Motley Fool has a Disclosure Policy.

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