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Domino’s Pizza Shares Plunge on Lower Profits But Analysts Optimistic on Outlook; Target Price $435

Domino’s Pizza, the largest pizza company in the world based on global retail sales, reported that its global retail sales rose 14.4% in the third quarter and same-store sales grew 17.5% in the United States as consumers ordered more pizzas during the COVID-19 pandemic, but weaker-than-expected profit pushed shares down over 10% in last two trading days of the previous week.

The largest pizza chain in the world said its revenues increased $146.9 million, or 17.9%, in the third quarter of 2020. This increase was primarily due to higher U.S. retail sales resulting from same-store sales growth and an increase in store counts during the trailing four quarters, resulting in the higher supply chain, U.S. franchise and U.S. Company-owned stores revenues.

“We expect the brand’s strong sales performance to continue, as consumers continue to gravitate toward Domino’s menu innovation, value proposition, and strong digital ordering infrastructure (still 75% of sales). We are raising our 4Q20 domestic same-store sales to 14% from 10% relative to 8% Consensus Metrix, remain above consensus in 2021 with our 2.2% vs consensus of 1.8%,” said Andrew M. Charles, equity analyst at Cowen and Company.

“We expect U.S. and Int’l comp strength to continue, while elevated supply chain & company stores costs are transitory. Mgmt is reviewing prior targets for 25,000 stores by 2025, an issue that is timing related as the goal was made pre-COVID, rather than capability, which creates some controversy. However, we believe this presents an opportunity for DPZ to deploy the $327M repurchase authorization.”

However, Domino’s diluted EPS was $2.49 for the third quarter of 2020, lowered than the market expectation of $2.79, but better than $2.05 in the prior-year quarter. That lower-than-expected profit on was largely due to surge pandemic-related costs – general and administrative costs rose 9.5% and commodity costs also rose 3.8%.

That pushed Domino’s shares down over 10% in the last two trading days of the previous week. Domino’s Pizza’s shares closed 2.5% lower to $390.95 on Friday; however, the stock is up over 30% so far this year.

Domino’s net income increased $12.8 million, or 14.8%, in the third quarter of 2020. This increase was primarily driven by higher income from operations resulting from increased U.S. franchise revenues as well as higher supply chain volumes, partially offset by higher variable performance-based compensation expense as well as COVID-related costs, including additional compensation and enhanced sick pay for frontline workers.

Domino’s Pizza stock forecast

Twenty-five analysts forecast the average price in 12 months at $435.32 with a high forecast of $500.00 and a low forecast of $380.00. The average price target represents an 11.35% increase from the last price of $390.95. From those 25, 16 analysts rated “Buy”, nine rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley target price is $446 with a high of $575 under a bull scenario and $318 under the worst-case scenario. Domino’s Pizza had its target price cut by Barclays to $390 from $345. Cfra upgraded shares from a hold rating to a buy rating and boosted their price target for the company to $450 from $400 in July.

Other equity analysts also recently updated their stock outlook. Robert W. Baird boosted their price target to $450 from $440 and gave the company an outperform rating. Longbow Research reaffirmed a buy rating and issued a $441 price. At last, Jefferies Financial Group lifted their price objective to $405 from $385 and gave the stock a hold rating.

Analyst view

“Weaker than expected flow through on a strong top-line quarter a near term setback, but costs likely transitory. Unit growth set back by closures, COVID-19, but this too is likely temporary; lowering 20/21 modestly to reflect these realties; rolling price target to ’22, and largely unchanged at $446,” said John Glass, equity analysts at Morgan Stanley.

“Delivery momentum supporting best in class system sales and unit growth in a still fragmented category; advantaged category in 2020 with Covid-19 disruption. Well-positioned in key US market: Technology leadership, data-driven investment and marketing decisions are hallmarks of the brand. Carry out market represents incremental growth. Sustainable competitive advantages vs aggregators on value, the delivery speed which could become more visible in ’20 and ’21. Strong cash flow generation, stable franchise income stream and international business are partially offset by a price competitive category & high leverage,” Glass added.

Upside and Downside Risks

Upside: 1) SSS growth returns to historical levels as DPZ wins vs competition. 2) Strong int’l sales as EMs grow in importance. 3) Fading delivery aggregator pressures. 4) Faster COVID-19 recovery, greater share gains/unit growth – highlighted by Morgan Stanley.

Downside: 1) Irrational aggregator discounting perpetuates. 2) Key markets fall into economic recessions; greater COVID-19 impact (including on cost side). 3) Domestic fortressing cannibalizes sales.

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