Domino’s Pizza (DPZ): Should you buy ahead of earnings?

The number of coronavirus patients across the world has crossed 2.5 million, which represents 0.03% of the world population. A good portion of the rest who are restricted to their homes are binge-watching on Netflix (NASDAQ: NFLX) with a Domino’s Pizza (NYSE: DPZ) and Coca-Cola (NYSE: KO) by their side. And coincidentally, all these companies are reporting quarterly earnings results this week.

At the time of writing, Coca-Cola has already reported a 25% drop in global volume and Netflix is yet to make its announcement. Domino’s will report first-quarter earnings results before the market opens on Thursday, April 23.  

There is little surprise in the offing as the company has already announced preliminary results earlier this month. So it’s safe to assume that some of the impacts due to COVID-19 are already baked into the stock. And yet, remarkably, DPZ is one of the few stocks that have displayed a bull run this year. Since the beginning of this year, the stock is up almost 25%! So is it unwise to stock it up before earnings? Let’s analyze a few factors to understand.

Investments turning fruitful

Domino’s management rightly judged the changing landscape in the food industry and made adequate investments in order to maintain a competitive edge. The investments in the digital platform and the opening of new stores to reduce delivery times have helped Domino’s maintain market share despite the onslaught of food delivery companies including DoorDash and Grubhub (NYSE: GRUB). The result was evident in the fourth quarter earnings when the pizza chain reported a sequential hike in US same-store sales in almost two years. Analysts lauded the achievement and investors sent the stock soaring over 25%.

See Domino’s Pizza AlphaGraphic

According to the company’s business update, Domino’s saw retail sales growth of over 7% in both US and international stores in January. The strong growth in the first month of the quarter should cushion some of the negative impacts in February and March. For the whole quarter the company has projected global retail sales growth of 4.4%.

 This is much lower than last year’s 8.5% growth but relatively stable given the current market scenario. Speaking on the impact in the latter half of the quarter, CEO Ritch Allison said:

“All U.S. supply chain centers are open and fully operational. Beginning in February and ramping up into March, US sales were impacted by many factors, which have varied in magnitude across the cities and towns we serve. Shelter in place directives, pantry loading, university and school closures, event cancellations, and the lack of live televised sports have all impacted our business in ways that we cannot yet fully quantify.”

Liquidity concern

At the end of fiscal 2019, the pizza firm had long-term debt of over $4 billion and cash equivalents at just $190 million. Under normal circumstances, the debt load would not have concerned investors, as long as the company keeps delivering higher revenues. However, the pandemic will once again put the limelight on the company’s cash position.

It may be noted that Domino’s had announced that it was hiring 1,000 more people to meet the delivery requirements during the lockdown, like rival Papa John’s (NASDAQ: PZZA) did. These are an additional cost burden on a fragile balance sheet. To ease the pressure, there is a high likelihood that it would do away with share buybacks.

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Estimates

The management had earlier suspended its guidance like many other firms. Analysts expect EPS of $2.32 for the first quarter of 2020 on revenues of $868.67 million, representing a modest growth from last year. Domino’s has surpassed earnings expectations in three of the trailing four quarters.

In view of the recent stock rally and liquidity concerns, initiating a stake might not be an excellent idea. Also keep in mind that the stock is currently trading around its average price target, which could limit the possibilities of further increase post earnings. However, with a strong digital arm and better clusters of stores, DPZ makes a good Hold option.

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Rival Yum! Brands (NYSE: YUM), which runs Pizza Hut, is slated to report quarterly results on April 29, before the regular trading hours.

DISCLAIMER: The article does not necessarily imply the views of AlphaStreet, and contains opinions of the author alone.