Founded in 1960, Domino's Pizza Inc. (DPZ), which is headquartered in Ann Arbor, Mich., is the world's largest pizza company, with a substantial delivery and carryout operation. It is one of the most well-known restaurant chains globally, with more than 18,300 outlets in more than 90 countries.

DPZ’s shares have declined 10% over the past month to close yesterday’s trading session at $459.90 because the company failed to beat the consensus revenue estimate in its last reported quarter. A slowing in U.S. same-store sales added to investor concerns.

The stock is currently trading 16.2% below its 52-week high of $548.72, which it hit on June 22, 2021. Though the company has witnessed strong earnings growth, weakness in sales could keep investors concerned. Furthermore, the ongoing labor crunch could dampen DPZ’s growth prospects.

Here’s what could shape DPZ’s performance in the near term:

Slowing demand

The world's largest pizza chain battled a slowdown in delivery demand and a tight labor market that caused a driver shortage, leading the company to report its first decline in U.S same-store sales in more than a decade. Furthermore, DPZ stated that a significant labor shortage in the United States affected its business operations, forcing it to shorten store hours and compromise on delivery times.

In addition, the company failed to meet Wall Street's sales expectations. Consequently, the stock lost 4.1% in price last week.

Mixed Financials

For its third fiscal quarter ended September 12, 2021, DPZ’s revenue increased 3.12% year-over-year to $997.99 million. Its operating income grew 6.41% from its year-ago value to $385.20 million. The company's net income surged 21.5% from the prior-year quarter to $120.40 million over this period. And its EPS increased 30.1% year-over-year to $.24.

However, DPZ’s U.S. same-store sales declined 1.9% from the year-ago period. In addition, the company announced the closure of nine international stores and one U.S. store over this period.

Premium Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 33.22x, which is 129.9% higher than the 14.45x industry average. Also, its 3.76x forward Price/Sales multiple is 211.7% higher than the 1.21x industry average. Also, DPZ’s 4.90x forward EV/Sales  is 237.8% higher than the 237.8% industry average.

The stock’s 24.31x forward EV/EBITDA multiple is 136% higher than the 10.30x industry average.

Strong Profitability

DPZ’s 18.1% trailing-12-months EBIT margin is 88.5% higher than the 8.6% industry average. Also, its ROC and ROA are 459.4% and 341.2% higher than the respective industry averages. Furthermore, its $676.38 million in cash from operations is 224.4% higher than the $208.51 million industry average. 

POWR Ratings Reflect Uncertainty

DPZ has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DPZ has a D grade for Growth. This is justified given the company’s mixed financial performance in the last quarter.

The stock also has a C grade for Value. DPZ’s higher-than-industry valuation multiples are consistent with these grades.

Of the 48 stocks in the A-rated Restaurants industry, DPZ is ranked #36.

Beyond what I’ve stated above, one can view DPZ ratings for Stability, Sentiment, Momentum, and Quality here.

Bottom Line

DPZ has achieved significant earnings growth in its last reported quarter. However, the company failed to beat consensus revenue estimates. Ongoing labor shortages also disrupted DPZ’s business operations. Thus, we think investors should wait for some improvement in its prospects before investing in the stock.

How Does Domino’s Pizza Inc. (DPZ) Stack Up Against its Peers?

While DPZ has an overall C rating, one might want to consider looking at its industry peers, Good Time Restaurants Inc. (GTIM), RCI Hospitality Holdings Inc. (RICK), and Chuy’s Holdings Inc. (CHUY), which each has an overall A (Strong Buy) rating.

DPZ shares were trading at $463.92 per share on Tuesday morning, up $4.02 (+0.87%). Year-to-date, DPZ has gained 21.78%, versus a 21.45% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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