Domino's trades lower following Q3 results but long term outlook looks tasty (DPZ)

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Last Update: 16-Oct-18 09:26 ET

Domino's Pizza (DPZ 261.30, -11.64, -4.27%) is trading lower today after reporting Q3 earnings this morning. The company was founded in 1960. Since then it has become a leader in pizza delivery, with a significant business in carryout pizza. It has a very large international presence.

It ranks among the world's top public restaurant brands with more than 15,300 stores in over 85 international markets. Domino's had global retail sales of $12.2 bln in 2017, with more than $5.9 bln in the US and $6.3 bln internationally. These are retail sales at the store level which are not the same as reported sales for Domino's. Those are primarily made up of royalty/franchise fees. DPZ does operate company stores, but more than 97% of its locations are run by franchisees.

Domino's has made a big push to incorporate digital/online technology into the pizza ordering process with good success. In fact, more than half of all global retail sales in 2017 came from digital channels, primarily online ordering and mobile apps.

In the US, Domino's generates over 60% of sales via digital channels and has produced several innovative ordering platforms, including Google Home, Facebook Messenger, Apple Watch, Amazon Echo, Twitter, and text message. In late 2017, Domino's began an industry-first test of self-driving vehicle delivery with Ford and in April 2018, it launched Domino's HotSpots, featuring over 200,000 non-traditional delivery locations including parks, beaches, local landmarks, and other gathering spots.

Turning to the Q3 results, non-GAAP EPS rose 65% yr/yr to $1.95, which was much better than market expectations. Revenue rose 22.1% yr/yr to $786.0 mln, which was a bit below expectations. The company also had Q3 global net store growth of 232 stores, comprised of 173 net new international stores and 59 net new domestic stores.

In terms of domestic same store sales, they came in at a robust +6.3% (+4.9% company-owned, +6.4% franchise) while international comps came in at +3.3% (this excludes FX impact). These were good comps considering DPZ was lapping some real good comps in 3Q17 at +8.4% for domestic and +5.1% for international.

In sum, while DPZ initially traded lower after reporting results, the stock has moved off its lows. The revenue miss seems to be a concern for investors. Also, its Q3 domestic comps of +6.3% were quite good, but shy of the +6.9% comps in Q2 and the +8.3% comps in Q1. Perhaps this downward trend is weighing on the stock a bit as well.

The stock was trending lower in the past couple of weeks heading into this report. However, it may just be due to weakness in the overall market rather than a concern about the Q3 results. Despite the Q3 hiccup, the overall growth picture for DPZ looks quite good. On a final note, DPZ is probably benefiting from all the turmoil over at Papa John's (PZZA) following controversial comments by its founder and his removal.