The good thing about pizza, it's been commonly remarked, that even when it's bad, it's still pretty good. That's similar to the news that came out around Domino's Pizza (NYSE:DPZ) via its latest earnings report, which delivered excellent news on the sales portion, but couldn't quite close the box on meeting estimated earnings.
Great Crust, Burnt Toppings
There was absolutely a lot to like about the Domino's Pizza earnings report. Quarterly revenue was up 17.9%, thanks in large part to a lot more people staying home and ordering pizza in the quarter than was normally seen. Revenue came in at $968 million, which was well above the expected $953 million. Net income came in at $99.1 million, with earnings per share around $2.49 per share. That's well above what was seen this time last year, which boasted $2.05 per share earnings on $86.4 million. Same-store sales in the US were likewise up, rising 17.5% over the same time the preceding year. International operations were also up, but not quite as enthusiastically, as international same-store sales were up 6.2%.
However, it wasn't quite enough to mesh with Wall Street expectations. The consensus from Refinitiv expected Domino's to pull in $2.79 per share. While the company certainly made more money on people ordering out, there were increased costs associated with the coronavirus and various government orders therein that sent costs upward. For instance, the company needed to step up sick pay, as well as higher wages for its “frontline workers”. Throw in the double-edged sword of higher revenues that is compensation raises based on performance and that's more money that's got to go out just to keep Domino's spinning along.
Pushing Back Against Uncertainty
In perhaps even better news, the company managed to post these numbers with some locations still shut down. As of October 5, reports note, the company has just under 300 locations still closed in response to the coronavirus, and the company actually closed outright 126 locations, though most of these were in India, at the latest reports. However, Domino's also added 83 new locations, bringing the total number of Domino's locations as of early September to 17,256.
Moreover, the company took out $158 million in loans under variable funding notes, and has since repaid the borrowing in full, suggesting that the company's income is flowing nicely and seems safe for the long term.
Better yet, the company has taken deliberate action to get, and keep, new customers. The sporadic, shaky return of profession sports has put new demand for pizza and chicken wings in place, and Domino's has also been working on bringing out new innovations in a bid to keep customers out of competitors' hands. This includes developments from the comparable, like cheeseburger pizzas, to the clearly out of left field, like the release of a line of chicken tacos.
The analyst picture, meanwhile, is clearly upbeat. Our latest research finds the company currently has 10 “hold” ratings on it and 21 “buy” ratings, which is up one “buy” rating from 30 days ago, back to the same level it was at 90 days ago. In fact, just in the last 10 days, the company has seen four separate analysts boost their price targets. MKM Partners hiked guidance from $385 to $445, while Morgan Stanley went from $422 to $449. UBS Group gave shares a bump from $415 to $430, and Wells Fargo led it off with a hike from $407 to $423.
Going Forward in an Uncertain World
The issues Domino's faced in the third quarter will likely all play a part in the fourth quarter as well. The slow, intermittent return of pro sports will likely continue through the winter, and drive demand for delivery. Throw in the likelihood of weather-related issues keeping people at home—hard to go out to eat in a blizzard even with coronavirus restrictions in place—and demand for delivered, or even carryout, food will continue to be big. There may be some losses due to holidays getting in there—ordering pizza for Thanksgiving is unlikely at best, let alone Christmas—but these may be ameliorated by extra pre-holiday ordering.
The cost issues will also continue hitting Domino's; while sick pay may be less of a factor than it was going forward as reinfection rates are still sketchy, sick pay will be a factor. Domino's may ultimately start adjusting compensation to help restrain that particular cost. No matter what measures Domino's takes, it's clear that customers keep coming back, and that means likely good news ahead for the company next quarter.
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