Should you buy Domino’s Pizza (DPZ) stock ahead of Q3 earnings?

The fast-food industry is among the worst affected by the inflation-induced dip in consumer confidence, which is weighing on the demand for discretionary items. Domino’s Pizza, Inc.  (NYSE: DPZ) is no exception, and the country’s largest pizza chain is exploring ways to tackle the impact on sales.

As the company prepares for the third-quarter earnings release, the stock is trading at the lowest level in about one-and-half years. It has dropped steadily for over a month now, reversing the uptrend seen in the first half. The market selloff has contributed to the downturn being experienced since the December peak.

Valuation

Despite the pullback, the valuation is relatively high, which calls for caution when it comes to investing in the business. A more accurate picture is expected to emerge when the company reports earnings, allowing investors to make informed buying/selling decisions. At the same time, the management’s recent initiatives indicate Domino’s Pizza is on track to beat the temporary obstacles and become a stronger brand in the long term.

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Domino’s Pizza, Inc. Q2 2022 Earnings Call Transcript

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“We have successfully improved many pricing levels, including our standard menu pricing, our national offers, our local offers, and our delivery fees. This has helped us cover some of the cost increases we are incurring in both the food basket and labor market, while also ensuring we continue to deliver terrific value to our consumers,” said CFO Sandeep Reddy at the last earnings call.

In the most recent quarter, the company added 233 net stores to the network, expanding its global footprint further. When it releases third-quarter results on October 13, the market will be looking for a decrease in earnings per share to $3.0. Revenue is forecast to grow annually to $1.07 billion.

Financial Performance

In recent years, Domino’s Pizza has outperformed the S&P 500 quite often, thanks to its high-quality business and extensive franchise network. The company continues to generate decent cash flows. Also, stable ticket growth amid focused pricing action is offsetting the impact of the decline in order counts to some extent. The general view is that the worst is over for the company, and things would get better from here.

In the past two quarters, earnings declined and missed Wall Street’s estimates, which can be attributed to the pressure on margins from higher input costs. In the second quarter, revenue growth decelerated amid continued weakness in comparable sales, with US same-store sales falling 2.9%. An increase in the core supply chain revenues more than offset weakness in the other segments and lifted total revenues to $ 1.1 billion. Earnings dropped 8% to $2.82 per share.

Risks

Besides inflation, shortage of delivery staff and lingering COVID uncertainty would be a concern for the rest of the year. Going forward, the ongoing supply chain disruption would cause costs and expenses to remain elevated. Meanwhile, the management is introducing promotional offers to attract customers, such as nationwide discounts on online orders.

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MCD Earnings: McDonald’s comp sales up 10% in Q2; earnings beat

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Shares of Domino’s closed the last trading session down 3% but recovered in the early hours of Wednesday. Analysts’ consensus target price suggests a 31% growth in the next twelve months.