Domino’s Pizza Rises To The Occasion In Q3

Key Points

• Domino's Pizza popped on mixed results and guidance. 
• The company reiterated its guidance but reduced the outlook for spending. 
• The stock is confirming support at a key level that could result in a strong rebound. 

If you are wondering why Domino’s Pizza (NYSE: DPZ) stock jumped nearly 10% on mixed news you’ve come to the right place. By the end of this article, you will understand what is driving this consumer giant's share price and where it may be headed next. The takeaways from the report include near-term headwinds but efforts to control costs and a favorable outlook as well. The best news is that costs appear to be falling and that is having a positive effect on the outlook for margins and earnings for 2023. 

Domino’s Rockets Higher On Mixed Results 

Domino’s Pizza FQ3 was decent but came in mixed relative to the analyst's expectations. The company reported $1.07 billion in revenue for a gain of 7.2% over the last year. The revenue was as expected and driven by new stores, net 225, and pricing actions made over the past year. On a global basis, comps are up 4.7% but are impacted by FX headwinds that are expected to worsen in the coming quarter. On an FX-neutral basis, the comps came in at -1.6% and were offset by the higher store count. In the US, comps are up 2% while International comps are up 1.8% on an FX-neutral basis. 

The margins are where the news turns sour but it is offset by the guidance. The company’s gross margins declined despite the pricing actions put in place and were not offset by the decrease in SG&A expense. The gross margin contracted by 290 bps and the operating margin by 270 to leave the adjusted earnings well below expectations. The $2.27 in adjusted EPS is not only down 13.9% from last year but missed the Marketbeat.com consensus target by $0.19 or 630 bps. 

The good news, the news that has the stock moving higher, is the guidance and not so much the guidance for revenue but for earnings. The company is maintaining its outlook for revenue, and increased the expectation for FX headwinds, but also lowered the outlook for CAPEX and SG&A expense to a level worth $28 million in earnings or more than enough to offset the weakness in Q3. What investors shouldn’t do, however, is think this good news will automatically translate to Papa John’s (NYSE: PZZA) because it may be company specific. 

Domino’s Returns Capital To Shareholders 

Domino’s Pizza not only paid its dividend in Q3 but it repurchased shares as well. The repurchase is worth $196.1 million to shareholders which is equal to about 1.8% of the company. The current repurchase allotment is worth another $410 million to shareholders and can be expected to be used during the current and following quarters. The dividend is also attractive. The payout is only worth 1.45% which is less than the broad market but it is a safer-than-average payout and comes with a positive outlook for aggressive distribution increases. 

The Technical Outlook: Domino’s Pizza Rises From The Bottom 

The price action in Domino’s Pizza hit a new low just days before the earnings release but it looks like the bottom is in. The stock jumped 9% on the earnings news and is confirming support at this level. The question now is if the market will follow through on the move and drive the stock any higher. If so, investors might expect to see the price hit the $380 level before encountering major resistance. If not, this stock may fall back to its recent low where it may spark another round of buying.