BTIG analyst Peter Saleh downgraded DPZ to Neutral from Buy as a follow-up on the company’s earnings report released yesterday.
The pizza restaurant chain reported a Q1 EPS of $2.50, down from $3 in the year-ago period, missing the consensus estimates of $3.06. Revenue came in at $1.01 billion, up 2.8% YoY and just below the expected $1.03 billion.
DPZ reported total domestic stores comp growth of -3.6%, while analysts were expecting -1.21%. Domestic franchise comp growth stood at -3.2%, compared to the consensus estimates of -1.18%. DPZ reported a Q1 operating margin of 36.5%, compared to 39.6% in the year-ago period and analyst expectations of 38.6%.
The company reported net store auditions of 213 in the period, down 54% QoQ and in line with the analyst estimates. The new additions included 37 net store openings in the U.S. and 176 international openings.
Moving forward, DPZ expects certain headwinds to persist this year.
The company said that the decline in diluted EPS came as a result of a lower net income in Q1 2022 from the year-ago quarter, as well as due to a lower weighted average diluted share count.
Saleh outlined the company’s “inability to attract and retain delivery drivers, which is having an adverse effect on sales,” as a key driver behind the downgrade.
“Given the shortage of labor industry wide and lack of visibility on when that will improve, we believe it is prudent to step to the sidelines. We believe additional investments to significantly increase pay and benefits may be on the horizon, and in-turn menu price hikes that could diminish the Domino's value proposition. That said, we believe a consumer driven recession in which there is substantially more slack in the labor market would greatly benefit Domino's,” Saleh said in a client note.
Citi analyst Jon Tower lowered the price target to $424.00 per share from $487.00 although he reflected more positively on DPZ.
“1Q results were worse than feared (more bottom-line than top) and the NT environment still poses challenges. However, struggles in the US do not appear to stem from a demand issue, rather a “meeting the demand” issue, with staffing challenges front and center and a mix-shift headwind (i.e., carryout has a lower check average/no fees vs. delivery). Staffing has improved M/M since January (in-line with our Wait Watchers read) and DPZ is addressing this issue head-on (e.g., use of call centers) while opening the door to the possibility of 3PD… With the bad news in, new leadership set to take over, and many levers being set in motion to improve SSS, we like the set-up for the stock from here,” Tower added.
DPZ stock is down 1.6% in pre-market Friday after dropping 5.1% yesterday.
By Senad Karaahmetovic