Domino's shares tumble following earnings, setting up key test of support at 200-weekly

Domino's Pizza (DPZ) reported strong Q2 2024 results, surpassing analyst expectations on both the top and bottom lines. The company posted earnings per share (EPS) of $4.03, which was $0.35 higher than the consensus of $3.68. Revenues rose by 7.1% year-over-year to $1.1 billion, in line with the consensus. This solid performance was driven by robust global retail sales growth, strong same-store sales growth in the U.S., and positive international same-store sales.

The results were not enough to stave off selling pressure as the stock slipped below key support at the $475 level and broke below its 200-day moving average ($444) which has embellished the downside price action. The stock is coming in to test the 200-weekly ($406) which sets up as a potential bounce opportunity for traders.

Breaking down the segments, global retail sales grew by 7.2% excluding foreign currency impacts, with U.S. same-store sales up 4.8% and international same-store sales up 2.1%. The company saw a global net store growth of 175, contributing to a total of 1,421,574 square feet of office space leased year-to-date. Income from operations increased by 0.4%, or 1.7% excluding the negative impact of foreign currency exchange rates, highlighting the company's operational efficiency.

Revenue growth was primarily driven by higher supply chain, U.S. franchise advertising, and U.S. franchise royalties and fees revenues. The increase in supply chain revenues was attributed to higher order volumes and an increase in food basket pricing to stores, partially offset by a shift in the product mix. U.S. franchise advertising revenues benefited from higher same-store sales, a return to the standard 6.0% advertising contribution rate, and net store growth.

However, the gross margin for U.S. company-owned stores decreased by 1.0 percentage point due to higher insurance and labor costs. Supply chain gross margin saw a slight increase of 0.4 percentage points, driven by procurement productivity, despite investments in supply chain labor. Income from operations rose slightly by $0.7 million, or 0.4%, compared to the previous year, demonstrating stability amid rising costs.

Net income saw a significant increase of 29.8% to $32.6 million, largely due to a $26.4 million change in pre-tax unrealized gains and losses from the remeasurement of the company's investment in DPC Dash Ltd. The effective tax rate also decreased to 15.0% from 20.8% in the prior year, contributing to the net income growth. Consequently, diluted EPS increased by $0.95 to $4.03, a 30.8% year-over-year improvement.

Domino's also demonstrated strong cash flow management, with net cash provided by operating activities rising to $274.2 million in the first half of 2024, up from $242.3 million in the same period in 2023. The company spent $43.7 million on capital expenditures, resulting in free cash flow of $230.5 million, a notable increase from the previous year's $204.3 million.

Looking ahead, Domino's continues to project robust growth with annual global retail sales expected to grow by 7% or more, and annual income from operations expected to grow by 8% or more. The company anticipates global net store growth of 825 to 925 in 2024, although it temporarily suspends its long-term guidance metric of 1,100+ global net stores until it gains more visibility into the impacts of store openings and closures by its master franchisee, Domino's Pizza Enterprises. Overall, Domino's remains optimistic about its long-term growth prospects, underpinned by its strong operational performance and strategic initiatives.