Shares of Domino's Pizza (NYSE: DPZ) were down 13.5% as of 1:35 p.m. ET Thursday despite reporting strong earnings in its fiscal Q2 2024 financial report this morning.
Heading into the quarterly update, analysts forecast Domino's would earn $3.65 per share on $1.1 billion in sales in Q2. But while the company only met the sales target, its earnings were much stronger than forecast, coming in at $4.03 per share.
So why is the stock down today?
Domino's second-quarter results
Total revenue for the pizza chain was up 7%, in line with expectations. However, Domino's appears to have fallen just short of predictions for same-store sales growth in particular (4.8%), and so relied more on opening new stores than on growth at existing stores to hit analysts' revenue target. Specifically, Domino's opened 175 new stores in Q2, and that's where the sales boost came from. Worse, this increase in revenue didn't translate into significantly higher earnings, with operating profits up less than 1%.
On the plus side, Domino's reported quarterly net income rose 30%, although this was primarily due to a lower tax rate and a change in "pre-tax unrealized gains and losses associated with the remeasurement of the Company's investment in DPC Dash Ltd." Buybacks helped to push per-share earnings growth up to 31%.
Is Domino's stock a buy?
Domino's reassured investors that it's still hoping to increase sales 7% annually long term, and says operating income growth will bounce back to about 8%, but investors don't seem convinced. This may owe in part to Domino's saying it will slow the rollout of new store openings going forward (recall that new stores were how Domino's was able to boost sales 7% in Q2).
Domino's will open only 925 new stores this year (instead of 1,100). The company further suspended plans to grow its global store count by 1,100 per year. In the U.S., openings will continue at about 175 per year, but global expansion will slow.
Factor in a pricey 31 times earnings valuation, and Domino's stock looks too expensive to buy right now.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Domino's Pizza. The Motley Fool has a disclosure policy.
