Year to date, shares of Domino's Pizza (DPZ - Get Report) are up 37%. After a disappointing first quarter, the company rallied back with a second-quarter blowout. Can Domino's deliver a strong third quarter?
Domino's Pizza reports third-quarter results before the market open on Tuesday. It's a real nail-biter.
At the end of April, Domino's reported a disappointing first quarter, and investors ran for the exits. The stock gapped down by almost 11% on the news. But the company came back with a second-quarter blowout that left investors scrambling to buy the stock.
Up until the first quarter, U.S. same-store sales had been positive for 20 straight quarters. The last five of those quarters, comps were up by double digits. But first-quarter same-store sales were up just 6.4%, which broke the string of double-digit comps. International comps have been positive for 89 quarters in a row.
Domino's missed estimates by 9 cents per share. Revenue rose 7.4% to $539.1 million, vs. the $545.45 million consensus. There were two big issues in the first quarter. First, the fiscal year started on Jan. 4, which moved the all-important New Year's Eve back into the fourth quarter. Second, there was margin pressure due to higher wages.
But those who sold the stock on the first quarter report quickly came to regret their decision. The second quarter was very strong. Domino's beat the consensus estimate by 4 cents per share to report earnings per share of 98 cents. Same-store sales were 9.7% for domestic stores and 9.8% for franchise locations. Revenue rose 12% to $547.3 million, vs. the $532 million estimate.
In the second quarter, Domino's added 244 net new stores and 1,011 net new stores over the trailing four quarters.
Domino's margins have been hurt by higher wages. But on the second-quarter call, management implied that the company's momentum was definitely carrying through to the third quarter, so maybe the margin pressure won't matter than much.
And what about valuation? Domino's is trading at 30 times fiscal 2017 earnings estimates of $4.95. This stock is priced for perfection. There's huge downside risk if the company misses the consensus forecast.
In the past, I've been a big fan of Domino's. But I'm afraid the quarter won't be enough for momentum investors who are paying 36 times this year's estimates or 30 times next year's estimates. When the first quarter wasn't quite up to snuff, investors freaked out and fled.
I'd rather sit out this quarter and see what happens. While I'm optimistic that Domino's can produce a strong third quarter, I'm worried about the valuation.