Domino's Pizza's Spectacular Earnings Sent Its Shares Higher, Do They Have More Room to Run?

Domino's just announced its second-quarter earnings and its stock responded by making a sharp move higher, let's see if it has more room to run.

Joseph Solitro
Joseph Solitro
Jul 24, 2014 at 1:40PM
Consumer Goods

Domino's Pizza (NYSE:DPZ), the world's largest pizza delivery chain, announced its earnings results for the second quarter on July 22 and its shares responded by spiking more than 3.5% higher. Let's break down the key financial results to determine whether Domino's quarter was as great as the market made it out to be and if its stock represents a long-term investment opportunity today.

Source: Domino's Pizza

The delectable second-quarter results
Domino's released its second-quarter report before the market opened on July 22 and the reported statistics surpassed expectations by a healthy margin; here's a summary:

MetricReportedExpectedYear Ago
Earnings Per Share $0.67 $0.65 $0.57
Revenue $450.46 million $439.18 million $414.01 million

Source: Estimize

Earnings per share increased 17.5% and revenue increased 8.8% year-over-year, driven by same-store sales growth of 5.4% at domestic locations and impressive 7.7% growth at international locations. This was the 82nd consecutive quarter in which the company achieved positive same-store sales growth internationally, which showed once again that it is one of the world's fastest-growing brands.

Source: Domino's Pizza

Domino's gross profit increased 6.9% to $134.65 million and its operating profit increased a very strong 10.2% to $81.36 million; in relation, its gross margin contracted 50 basis points to 29.9% and its operating margin expanded 30 basis points to 18.1%. The gross margin contracted because cost of sales rose 9.7%, mainly because prices rose for key ingredients. However, its operating margin expanded because general and administrative expenses increased just 2.2% in comparison with its quarterly revenue growth of 8.8%. 

Because of the results above, Domino's quarterly net cash provided by operations totaled $60.79 million and it reported $18.95 million in capital expenditures, which resulted in $41.84 million in free cash flow. The company used this free cash and the $38.38 million in cash and cash equivalents it had to begin the quarter to repurchase 687,750 shares of its common stock for approximately $49.9 million and pay out approximately $14.08 million in dividends.

There is now $149.8 million remaining in Domino's share repurchase authorization, so it will likely continue to repurchase shares in the third quarter and it has already announced that it will maintain its $0.25 quarterly dividend and pay it out on September 30.

Lastly, in terms of expansion, Domino's added 133 net new stores in the second quarter, all of which were franchises, which brought its total store count to 11,121 worldwide. Of its now 11,121 stores, 376 are domestic company-owned stores, 4,626 are domestic franchise stores, and 6,119 are international franchise stores. The company noted that surpassing the 11,000 store mark was "an important milestone for a growing brand," but I believe this is just a fraction of the total number of stores it could reach in the long term.

Source: Domino's Pizza

So how good was the quarter and should we be buyers?
Overall, it was a remarkable quarter for Domino's and its President and Chief Executive Officer, J. Patrick Doyle, proudly stated, "The first half of 2014 has proven to be yet another positive story for our global brand and hardworking franchisees. We are performing well in the U.S. and international markets by driving sales and building stores around the world."

Source: Domino's Pizza

The market was as impressed as Mr. Doyle was and sent Domino's shares 3.71% higher in the trading session that followed. Even after this rally, its shares still sit more than 5% below their 52-week high, trade at favorable current and forward valuations, and have a very healthy dividend yield of about 1.3%, which makes a strong case that the shares could go much higher.

In addition, the company's focus on expanding through franchising allows it to remain asset-light and pass on the majority of expenses to its franchisees, which will enable it to remain focused on growing its brand rather than on day-to-day store operations; this also gives the company more freedom to use its cash to maximize shareholder value through actions like accelerating share repurchases and raising its dividend, which I think it will continue to do.

With all of this being said, I believe that Domino's stock has plenty of room left to run in 2014 and it could easily outperform the overall market for many years to come. 

Source: Domino's Pizza

The Foolish bottom line -- Buy Domino's
Domino's Pizza is one of the world's fastest growing brands and this has led to great financial performances like the one in the second quarter. Its stock jumped more than 3.7% higher following the earnings release on July 22, but I believe this is only the beginning of a rally much higher and am confident that the stock will set new all-time highs in the second half of the year.

Foolish investors should strongly consider initiating long-term positions right now and adding to them on any weakness provided by the market so Domino's can provide them with significant returns over the next several years.