October 10, 2017 | 12:26 PM by Jay Kunstman | jkunstman@jaguaranalytics.com

Earnings Preview – Domino’s Pizza (DPZ)

Wall Street Expectations:

-EPS of $1.22
-Revenue of $623.2M

Historical Earnings Performance:

Channel Checks/Analyst Commentary:

BAML – Last night, analyst Gregory Francfort was out with a preview note where he models 8% domestic 3Q same store sales for Domino’s, which would be an 180bps acceleration in the two-year comp stack and 50 bps deceleration in the three year. He said investors seem to already be expecting solid sales for the quarter but he also believes Domino’s will deliver against these high expectations. Pizza Hut talked cautiously about near-term trends at its recent brand day in Dallas which lowered the risk of competitive impacts to Domino’s business in the quarter.

For its international business, BAML is modeling 3% international comps. They said to keep an eye on earnings on October 10th from Domino’s Pizza Group, the company’s U.K. franchisee, as it will give investors an early look into trends for the international segment. For reference, the U.K. is the second biggest non-U.S. market by units for Domino’s and the company blamed the country for soft international sales in 2Q.

This morning, the company reported that Group System Sales in the 13 weeks to September 24th increased 20.8% to 286.4 million pounds, with sale at U.K. stores open for more than a year rising 8.1%. In addition, online sales in its main U.K market jumped 17.4%.

Stifel – On October 2nd, Stifel analyst Chris O’Cull initiated coverage with a Buy Rating and $235 price target and said his checks indicate domestic SRS momentum remains strong and better than the Street 6% mean.

Wells Fargo – On October 2nd, the firm reiterated its Market Perform rating and raised their price target to $210 from $204 saying fears of competitive encroachment weighing on its U.S. same store sales are likely “overblown” in the near-term, with the company set to deliver another quarter of outperformance.

Credit Suisse – On October 4th, analyst Jason West initiated coverage with a Neutral rating and $200 price target. He said that DPZ continues to be one of the best growth stories, but the competitive environment for restaurant delivery is undergoing dramatic change.

When companies such as McDonald’s and Amazon are entering your core business (delivery = ~2/3 of DPZ’s US sales), we get concerned. To date, DPZ has more than held its own (with 1H17 US SSS +10%). However, this threat is not going away, and any slippage in SSS would likely exacerbate investor concerns around new competition (whether perception or reality), leading to significant multiple compression.

DPZ’s int’l SSS slowed to +2.6% in 2Q17, the weakest result in many years, largely due to challenges in Europe. Specifically, the UK business (DPZ’s largest outside the US) posted a +0.1% SSS result, with mgmt. citing promotional missteps and new store cannibalization (~200bps drag). The UK is also one of the most developed markets in the world for third-party delivery services, raising the question of how UK SSS weakness may translate to other markets around the world going forward.

We note that DPZ’s company-operated margins are under pressure due to labor costs and investments in supply chain and tech may weigh on incremental margins/returns in coming years

Option Flow

On September 19th, there was a buyer of 800 October 200 Calls for 5.00 – 5.50

#DPZ

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