Domino's (NYSE:DPZ) Misses Q3 Revenue Estimates

Adam Hejl /
2023/10/12 9:33 am EDT

Fast-food pizza chain Domino’s (NYSE:DPZ) fell short of analysts' expectations in Q3 FY2023, with revenue down 3.86% year on year to $1.03 billion. Turning to EPS, Domino's made a GAAP profit of $4.18 per share, improving from its profit of $2.79 per share in the same quarter last year.

Is now the time to buy Domino's? Find out in our full research report.

Domino's (DPZ) Q3 FY2023 Highlights:

  • Revenue: $1.03 billion vs analyst estimates of $1.05 billion (2.1% miss)
  • EPS: $4.18 vs analyst estimates of $3.29 (27.2% beat)
  • Free Cash Flow of $362.9 million, up from $108.7 million in the previous quarter
  • Gross Margin (GAAP): 38.8%, up from 35.7% in the same quarter last year
  • US Same-Store Sales were down 0.6% year on year
  • Store Locations: 20,197 at quarter end, increasing by 678 over the last 12 months

"We continue to execute on our initiatives to drive sustainable growth in the U.S.," said Russell Weiner, Domino's Chief Executive Officer.

Founded by two brothers in Michigan, Domino’s (NYSE:DPZ) is a globally recognized pizza chain known for its creative marketing and fast delivery.

Traditional Fast Food

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Sales Growth

Domino's is one of the larger restaurant chains in the industry and benefits from a strong brand, giving it customer mindshare and influence over purchasing decisions.

As you can see below, the company's annualized revenue growth rate of 5.92% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre, but to its credit, it opened new restaurants and grew sales at existing, established dining locations.

Domino's Total Revenue

This quarter, Domino's reported a rather uninspiring 3.86% year-on-year revenue decline, missing analysts' expectations. Looking ahead, the analysts covering the company expect sales to grow 6.4% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. See it here.

Number of Stores

When a chain like Domino's is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. Since last year, Domino's restaurant count increased by 678, or 3.47%, to 20,197 locations in the most recently reported quarter.

Domino's Operating Retail Locations

Over the last two years, Domino's has rapidly opened new restaurants, averaging 5.69% annual increases in new locations. This growth is among the fastest in the restaurant sector. Analyzing a restaurant's location growth is important because expansion means Domino's has more opportunities to feed customers and generate sales.

Same-Store Sales

Same-store sales growth is a key performance indicator used to measure organic growth and demand for restaurants.

Domino's demand within its existing restaurants has barely risen over the last eight quarters. On average, the company's U.S. same-store sales growth has been flat, or about 0.06% year on year.

Domino's US YoY Same Store Sales Growth

In the latest quarter, Domino's U.S. year on year same-store sales was down 0.6%. By the company's standards, this growth was a meaningful deceleration from the 2% year-on-year increase it posted 12 months ago. One quarter fluctuations aren't material for the long-term prospects of a business, but we'll watch Domino's closely to see if it can reaccelerate growth.

Key Takeaways from Domino's Q3 Results

Sporting a market capitalization of $12.4 billion, more than $80.9 million in cash on hand, and positive free cash flow over the last 12 months, we believe that Domino's is attractively positioned to invest in growth.

We enjoyed seeing Domino's exceed analysts' EPS expectations this quarter. That really stood out as a positive in these results. On the other hand, revenue missed and US same store sales were tepid. Over the longer term, the company gave an update that it "expects its 2023 global retail sales growth, excluding foreign currency impact, to trend modestly below the mid-point of its 4% to 8% two -to three-year outlook." Overall, the results could have been better. The stock is up 2% after reporting and currently trades at $362 per share.

Domino's may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here.

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The author has no position in any of the stocks mentioned in this report.