Domino’s Earnings: Soft Traffic and Delivery Headwinds Weigh Down Shares; We See Opportunity

Domino’s DPZ showed some signs of stabilization during its mixed first-quarter earnings, with 5.9% currency-neutral sales growth and 7.9% growth in operating profit driving a sharp pre-market pop (6%-7%) before earnings commentary drove a crushing share price reversal (down nearly 7% intraday). Traffic declines during the quarter and persistent pressure in the delivery business were sub-optimal if not entirely unexpected, with lower-income consumers trading out of the higher-cost delivery channel in favor of at-home meals. As we digest results, we expect to lower our $397 fair value estimate by a low-single-digit percentage due to expectations for top-line pressure to persist through the first half of 2024, in lieu of easing earlier in that year, but we view shares as quite attractive for long-term investors at a high-teens (17%-18%) percentage discount to our revised intrinsic valuation.

More concretely, the wide-moat operator reported solid first-quarter earnings per share, with $2.93 in diluted EPS edging our $2.67 forecast despite a narrow top line miss ($1.02 billion against our $1.03 billion estimate). Those results were underpinned by reasonable same-store sales growth—3.6% in the U.S. and 1.2% in international markets (excluding foreign exchange)—a mix benefit from refranchising 114 stores, and strong administrative cost containment. We expect sluggish same-store sales growth over the rest of the year, with Domino’s lapping price increases in March and October of 2022.

Finally, while it was interesting to see the firm offer temporary 25-basis-point advertising royalty relief to its U.S. market franchisees, we believe that the simultaneous move to raise digital per-order fees by $0.08 (a lift of about 25%, adding roughly 30 basis points to franchise royalties moving forward) implies that unit economics remain healthy. Despite near-term pressure, our long-term forecasts remain largely intact, and Domino’s remains our top pick in the U.S. restaurant space.