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At the end of September, I said pizza giant Domino’s (DPZ) was going to new highs. I cited Domino’s focus on convenience and value as making it a winner in the post-COVID world, and on the valuation of the stock, which I found reasonable at the time.

Domino’s reported Q3 earnings late last week, and the stock was pummeled. Headline concerns were operating costs and international sales growth, causing investors to completely ignore yet another stellar quarter.

In addition, I see the stock at trendline support after another decline on Friday, which has taken shares back to $390. This trendline has been pretty reliable after beginning in April and has been successfully tested several times; I do not believe this time will be any different, and that Domino’s is due for a bounce.

Let’s take a look at the earnings report and see why I still believe Domino’s will reach new highs.

Another quarter of exemplary growth

By looking at the share price chart, you’d be forgiven for thinking Domino’s produced a terrible quarter that was worthy of a waterfall decline from its pre-earnings price. However, it appears to me that is far from the case.

Revenue was up 18% year over year, adding $147 million to the top line, primarily due to higher US retail sales. While the store count was up slightly year over year, the lion’s share of the revenue increase was from same-store sales.

US stores posted a staggering 17.5% gain in comparable sales in Q3, building upon a much more pedestrian 2.4% gain in the year-ago period. Not only does this have the tangible benefit of moving revenue much higher, but it also means that the gains Domino’s made in terms of revenue during the initial stages of the pandemic are sticking around.

The coronavirus pandemic is splitting the restaurant industry in two. Big, well capitalized chains like

Chipotle Mexican Grill Inc.

and

Domino’s Pizza Inc.

are gaining customers and adding stores while tens of thousands of local eateries go bust.

Larger operators generally have the advantages of more capital, more leverage on lease terms, more physical space, more geographic flexibility and prior expertise with drive-throughs, carryout and delivery. A similarly uneven recovery is unfolding across the business world as big firms have tended to fare far better during the pandemic than small rivals, thinning the ranks of entrepreneurs who could eventually become major U.S. employers. In the retail world, bigger chains like

Walmart Inc.

and

Target Corp.

are posting strong sales while many small shops struggle to stay open.

The divide between large and small restaurants surfaced in the summer. Chipotle more than tripled its online business sales in the second quarter while Domino’s,

Papa John’s International Inc.

and

Wingstop Inc.

all reported double-digit same-store sales increases in the third quarter compared with the year-earlier period. McDonald’s also said U.S. same-store sales rose 4.6% in the third quarter. That included a rise in the low double digits during September, its best monthly performance in nearly a decade. It credited faster drive-throughs and promotions.

Off Menu

People are spending less than during the last recession at restaurants, particularly smaller independent ones, straining the finances of many businesses.

U.S. restaurant consumer spending, change from previous year

U.S. food service sales,

change from previous year

Small U.S. businesses’ default rate on loans and leases

Accommodations

and food services

Small U.S. businesses’ default rate on loans and leases

U.S. restaurant consumer spending, change from previous year

U.S. food service sales, change from previous year

Accommodations

and food services

U.S. restaurant consumer spending, change from previous year

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Image source: The Motley Fool.

Domino’s Pizza Inc (NYSE: DPZ)
Q3 2020 Earnings Call
Oct 8, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2020 Domino’s Pizza, Incorporated Earnings Conference Call. [Operator Instructions]

And now I will hand the conference over to your speaker today, Chris Brandon, Director of Investor Relations. Please go ahead.

Chris BrandonDirector of Investor Relations

Appreciate that Carmen and good morning, everyone. Thank you for joining us for our conversation today regarding the results of our third quarter 2020. I’m also joined today by our Vice President of Finance, Michelle Hook, who recently took on an expanded role within our finance organization that includes oversight of our Investor Relations function in addition to her other responsibilities.

Today’s call will feature commentary from Chief Executive Officer, Ritch Allison; and Chief Financial Officer, Stu Levy. As this call is primarily for our investor audience, I ask all members of the media and others to be in a listen-only mode. I want to remind everyone that the forward-looking statements in this morning’s earnings earnings release and 10-Q also apply to our comments on the call today. Both of those documents are available on our website. Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in our filings with the SEC.

In addition, please refer to the 8-K earnings released to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today’s call. Our request to our coverage analysts, we, as always want to do our best to accommodate all of you today, so we encourage you to ask only one one-part

Here are five things you must know for Thursday, Oct. 8:

1. — Stock Futures Rise on Stimulus Optimism

Stock futures traded higher Thursday as Wall Street grew more optimistic lawmakers could secure further fiscal stimulus for the U.S. economy even if it comes in the form of smaller relief bills.

Contracts linked to the Dow Jones Industrial Average were up 105 points, S&P 500 futures gained 13 points and Nasdaq futures rose 65 points.

Stocks finished sharply higher Wednesday after President Donald Trump said he would consider alternative aid measures such as a new round of stimulus checks, the Paycheck Protection Program and support for airlines. House Speaker Nancy Pelosi also signaled support for a standalone airline stimulus bill.

Airlines have begun furloughing or laying off workers following the expiration of a federal prohibition on job cuts tied to the $25 billion in federal aid they received earlier this year. Airlines said they would reverse the furloughs if they received additional help.

“Even though there is uncertainty now about the fiscal stimulus negotiations, regardless of who wins the election, we are likely to have additional fiscal stimulus,” said Nancy Davis, founder of Quadratic Capital and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge ETF  (IVOL) – Get Report.

With the uncertainty, she added, “I think it’s important for investors to have a diversified portfolio, with investments that are uncorrelated to each other. We should expect more uncertainty going forward.”

2. — Thursday’s Calendar: Jobless Claims, Domino’s Pizza Earnings

The economic calendar in the U.S. Thursday includes weekly Jobless Claims at 8:30 a.m. ET. Economists forecast the number of Americans applying for first-time unemployment benefits last week to have dipped to 819,000 from 837,000 a week earlier. Data from California aren’t included in the