Domino's Pizza (NYSE:DPZ), the largest pizza delivery chain in the world, has been one of the best performing restaurant stocks since the Great Recession, including an incredible run of over 1,100% since March 2, 2009. Earnings have played an integral role in Domino's rise, and it could see another rally following second-quarter results, which are due out on July 22. Let's take a look at the company's most recent earnings release and the expectations for the upcoming report to determine if there is even any remaining room to run for this highflier.

Source: Domino's Pizza.

Sliding past expectations with ease
The first-quarter release by Domino's came on May 1 and the results surpassed analysts' expectations on both the top and bottom lines; here's a breakdown:

Earnings per share $0.68 $0.66
Revenue $453.85 million $440.89 million

Source: Estimize.

Earnings per share increased 15.3% and revenue increased 8.7% year over year, driven by a 4.9% increase in domestic same-store sales and a very strong 7.4% increase in international same-store sales; Domino's went on to note that this was the 81st consecutive quarter that it achieved positive international same-store sales growth, keeping its very impressive streak alive.

Source: Domino's Pizza.

Gross profit increased 5.6% to $137.04 million and operating profit increased 11.5% to $84.18 million, as the gross margin contracted 90 basis points to 30.2% and the operating margin expanded 50 basis points to 18.6%. The contraction of Domino's gross margin can be attributed to rising foods costs, which led to costs of sales increasing a higher-than-expected 10.8%, while the expansion of its operating margin was helped by general and administrative expenses decreasing 2.6% compared to the year-ago quarter.

In terms of expansion, Domino's opened 123 new locations and closed 21 existing locations during the quarter, bringing the company's total store count to 10,988; of those, 5,997 are located in Domino's domestic market and 4,991 are international. 

Lastly, Domino's generated a very solid $29.64 million of free cash flow during the quarter; this free cash and the company's $14.38 million in cash and cash equivalents to begin the quarter enabled it to repurchase 221,481 shares of its common stock for approximately $15.13 million and pay out $11.05 million in dividends. Domino's ended the quarter with $38.38 million in cash and cash equivalents, so it will likely accelerate repurchases and maintain its dividend in the quarters ahead.

In summary, it was a phenomenal quarter for Domino's, and investors are hoping the momentum will carry over into the second quarter.

What to expect when Domino's reports
Second-quarter results are due out before the market opens on July 22 and the current expectations call for moderate growth; here's an overview:

Earnings per share $0.65 $0.57
Revenue $437.07 million $414.01 million

Source: Estimize.

These estimates call for earnings per share to increase 14% and revenue to increase 5.6% compared to the same period a year ago. These numbers seem attainable, especially following the very strong first quarter we previously discussed, but there are four other important statistics and updates investors will want to watch for:

  1. Outlook: It will be important for Domino's to provide outlook on the third quarter that is within or above analysts' expectations; currently, the consensus estimates call for earnings per share of $0.60 and revenue of $428.01 million, representing year-over-year growth of 17.6% and 5.9%, respectively. 
  2. Margins: Keep a close eye on Domino's margins and make sure they are heading in a positive direction; the company has done well in keeping its costs of sales to a minimum and it has been very successful in lowering its general and administrative expenses, but there is always room for further improvement. 
  3. Expansion: Watch for the number of new stores opened during the quarter, because expansion will be key in the long-term growth of the company. Domino's has consistently added more than 100 new stores over the last several quarters, so look for 100-125 to be added in the second quarter.
  4. Share repurchases: At the end of the first quarter, Domino's noted that there was $188.6 million remaining on its share repurchase authorization, so it would be ideal if the company were to repurchase another $15 million-$25 million worth of its common stock in the second quarter.
I believe Domino's has momentum on its side and it will carry the company to its third consecutive earnings beat, causing its stock to rally back toward its 52-week high. I also believe Domino's stock is undervalued based on both its trailing-12-months earnings and forward earnings estimates, so investors could initiate long-term positions and not have to worry too much about short-term fluctuations in the stock.

Source: Domino's Facebook.

The Foolish bottom line
Domino's Pizza is one of the fastest-growing international brands and rising demand has led to great financial performances over the last few years. I believe the current expectations for its second-quarter results are well within reach, but investors will also want to keep an eye on its outlook, margins, expansion, and share repurchase activity. With all of this said, I think Domino's stock is undervalued at current levels, so Foolish investors might want to take a deeper look and consider initiating long-term positions soon.