Domino’s Earnings: Loyalty Program Changes and Uber Eats Ramp Should Drive Sales Turnaround

Wide-moat Domino’s DPZ posted solid third-quarter results, with $1.03 billion in sales and $4.18 in diluted EPS ($3.20 when excluding a non-cash gain on investment and differential tax rates) edging our $1.01 billion and $3.11 estimates, respectively. While unit growth of 1.8% in the U.S. and 4.3% in the firm’s international segment fell slightly short of our 1.8% and 5.5% respective forecasts, this was largely reflective of the disaggregation of Domino’s 143 Russian stores; underlying international segment growth of 5.9% and roughly 1,000 annual gross store openings are consistent with the firm’s development cadence over the past few years. On balance, we expect to lower our $397 fair value estimate by a low-single-digit percentage as we balance the impact of time value, the development shortfall, softer-than-expected company-owned store margins, and a slightly more positive outlook for fiscal 2024.

The restaurant industry remains challenged, with traffic and items per transaction falling 1.8% and 3.5%, respectively, over the three months ended in August, per Revenue Management Solutions data and our calculations. Consumers appear increasingly price sensitive, and a widening value gap with the lower-cost grocery channel is starting to drive price discipline—to this effect, Domino’s expects pricing to provide just a 1 point lift to fourth-quarter comparable sales. As we see it, the good news is that valuations have come in line with this reality. Public restaurants in our coverage trade at an 8% discount to our market-cap weighted valuations, and we see upside for operators that perform well on relative value (like Domino’s) and those with strong digital touchpoints. Domino’s 80%-plus digital sales mix in the U.S., ramping Uber Eats integration, and loyalty program revamp all point toward opportunity for flat to positive traffic and mix in the fourth quarter and into 2024, and shares offer modest upside from current prices.