Domino’s Earnings Were Good. But a Lot of Pizza Is Baked Into Its $25 Billion Goal


Al Root

Jul 17, 2020

Pick up or delivery? It doesn’t matter. No matter how U.S. consumers choose to get their pizza pies, they are getting a lot of them. Just look at Domino’s Pizza.
The restaurant chain crushed second-quarter earnings estimates on Thursday. Investors appear happy, but to keep the momentum, even more pizzas need to be sold. Expectations can be funny that way.
Domino’s (ticker: DPZ) earned $2.99 a share from $920 million in sales. Analysts were looking for $2.25 a share from $912 million in sales. It is the largest earnings “beat” since, well, the first quarter, when earnings exceeded analyst estimates by 32%. 
Things are going pretty well for pizza these days. U.S. same-store sales, a key metric for any retail operation, advanced more than 16% year over year. 
Still, the stock fell 1.5% Thursday to $407.52. The Dow Jones Industrial Average, for comparison, lost 0.5% and the S&P 500 fell 0.3%.
Domino’s stock, coming into the earnings report was up about 40% year to date. Papa John’s (PZZA) shares have gained 46% year to date. What’s more, Domino’s and Papa John’s shares trade for about 33 and 43 times estimated 2021 earnings, respectively, big premiums to their on valuation multiple history and big premiums to the 20 times multiple of the S&P 500. 
Results have to be good to sustain the share-price performance. The company, for its part, isn’t relying on pandemic to boost sales. “We have continued to attract new customers to our brand while focusing on safety, convenience and value,” CFO Jeffrey Lawrence said on the company’s earnings conference call. He highlighted Domino’s loyalty program and push for larger order sizes. 
Wall Street looks impressed with the quarter. Gordon Haskett analyst Jeff Farmer noted in a Thursday research report that the company rapidly repayed March borrowing. Domino’s drew down its credit line as a precautionary measure. Even management didn’t know pizza was gong to be that popular during pandemic. 
Bernstein analyst Sara Senatore noted that same-store sales comparisons appeared to exit from the quarter at a low 20 percentage point rate. Comps improved compared with a mid-quarter update. That is also pretty good, with a caveat. 
“Given the buy-side’s bullish positioning into this report, however, we expect the stock reaction to be more muted than the beat would suggest.” She appears to have called it correctly. Senatore rates shares the equivalent of Hold and has a $330 price target, well below where the shares are trading. 
Farmer also rates shares Hold but his target is $415, which doesn’t imply big gains from here. But Domino’s stock can work if management executes on its long-term goals. The company is aiming for $25 billion in system sales by 2025. 
That works out to 2.5 billion large pies. A large Brooklyn style pizza can be had for $10. This is only a proxy. Toppings and other food items, including pastas, wings, hero sandwiches and soda alter average check size. Still, it’s a lot of pies. 
System sales in 2019 amounted to about $14 billion. To reach $25 billion means the chain would have to increase sales about 10% a year on average. Wall Street currently expects about half that long-term growth rate. So there is a big gap between aspirations and how analysts value the stock. 
More years like 2020 and $25 billion in system sales will be easy. Whether it be toilet paper shortages, the Federal Reserve strategic coin reserve or pizza consumption, this has turned out to be a very strange year. 
Domino’s sales and system sales don’t match because of the way franchise sales are accounted for.​