In the stock market, the reaction to an earnings report is often based on relative considerations. The results can be good, but the reaction can be bad if the results weren't deemed good enough. Conversely, the results can be bad, but the reaction can be good if the results were better than feared. Domino's Pizza (DPZ 198.31, -15.66, -7.3%) is encountering the former response after its good second quarter earnings report.
First, here is what Domino's delivered for the second quarter at a time when restaurants and retailers have found it increasingly challenging to increase sales and traffic:
- Revenue growth of 14.8% to $628.6 million, which was bolstered by higher supply chain revenues from increased volumes
- Domestic same-store sales growth of 9.5%
- International same-store sales growth of 2.6%
- Global net store growth of 217; and
- A 34.7% increase in diluted earnings per share of $1.32, which was comfortably ahead of analysts' average expectation
None of that is bad by any stretch of the operating imagination, yet shares of DPZ are down 7.3% in the wake of the second quarter report.
The fallout can be attributed to the company's own admission that international same-store sales growth was slightly under its expectations, as well as the recognition that the pace of domestic same-store sales growth has slowed from the previous three quarters when it was double-digits.
Separately, a higher cost of sales and increased general and administrative expenses triggered a 100 basis points compression in its income from operations as a percentage of total revenues (18.0% vs. 19.0% a year ago).
The stock of DPZ has been a beauty this year, up 34.4% as of Monday's close, and an absolute beast in this bull market, soaring close to 7000% from its November 2008 low.
It has won acclaim as a growth stock and entered today's session trading at approximately 39x estimated FY17 earnings. Accordingly, a good report that carries a blemish can lead to some profit-taking action, like it is today, although we wouldn't rule out some underlying concerns about difficult comparisons to its past success as another contributing factor for today's selling interest.