U.S. consumer confidence has taken a significant hit, dropping to its lowest point in four months in September. Lingering concerns about rising prices and recession fears have cast a shadow on consumer sentiment.

The consecutive decline in confidence, reported by the Conference Board, also reflects anxiety over higher interest rates and the political environment. Moreover, while inflation is slowing, prices remain elevated compared to pre-pandemic levels, affecting consumer optimism.

Pizza giant, Domino’s Pizza Inc. (DPZ) is set to announce its earnings this week. After a thorough analysis of the stock, I conclude that it might be best for investors to wait for a better entry point in the stock.

In the fiscal second quarter that ended June 18, 2023, DPZ recorded a dip in revenue, owing to a decrease in supply chain revenues due to lower pricing, and the refranchising of U.S. Company-owned stores in 2022.

A similar trend is anticipated for the to-be-announced quarter and the current year. While analysts expect DPZ’s EPS to rise 18.1% year-over-year to $3.30 in the to-be-announced third quarter that ended September 2023, its revenue is expected to decline 1.8% year-over-year to $1.05 billion in the same quarter.

Moreover, DPZ’s EPS is expected to increase 9.4% year-over-year in the current year ending December 2023 to $13.71. However, its revenue is expected to decline marginally from the previous year to $4.53 billion in the current year.

Additionally, concerns surrounding market basket pricing, order volumes, and the adverse impact of foreign currency exchange rates on international franchise royalties and fees, which had already affected revenue in the previous quarter, continue to pose challenges in the to-be-announced quarter results.

While the stock has soared 12.8% over the past year, it has declined 8.5% over the past month, closing the last trading session at $350.14.

Here is what could impact DPZ’s performance in the upcoming months:

Partnership with Microsoft to Revolutionize Pizza Ordering with AI and Cloud Technology

On October 3, DPZ partnered with Microsoft Corporation (MSFT) to revolutionize pizza ordering and store operations using generative AI technology and cloud computing. The collaboration will also enhance the customer experience by leveraging Azure OpenAI. Both companies are committed to responsible AI practices to protect customer data and privacy.

Mixed Financials

During the second quarter that ended June 18, 2023, DPZ’s total revenues decreased 3.8% year-over-year to $1.02 billion. However, the company’s gross margin grew 4.8% from the year-ago quarter to $404.66 million. Also, its net income and EPS rose 6.7% and 9.2% year-over-year to $109.38 million and $3.08.

Mixed Profitability

DPZ’s trailing-12-month gross profit margin of 26.43% is 25.4% lower than the industry average of 35.41%. Its trailing-12-month CAPEX/Sales of 2.05% is 36.9% lower than the 3.25% industry average.

However, its trailing-12-month EBIT and EBITDA margins of 17.79% and 18.93% are favorably higher than the 7.36% and 10.93% industry averages. Furthermore, its trailing-12-month net income margin of 10.49% is 138.6% higher than the 10.49% industry average.

Premium Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 25.54x, which is 78.9% higher than the 14.28x industry average. Its 2.71x forward Price/Sales multiple is 230.6% higher than the 0.82x industry average. Also, DPZ’s 3.85x forward EV/Sales  is 244.7% higher than the 1.12x industry average.

The stock’s forward EV/EBITDA multiple of 19.32 is 1101% higher than the 9.16x industry average.

POWR Ratings Reflect Uncertainty

DPZ has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DPZ has a C grade for Momentum. While the stock is trading above the 200-day moving average of $345.39, it is trading below the 50-day moving average of $385.53.

The stock also has a C grade for Sentiment, in sync with its mixed analysts’ estimates.

Of the 44 stocks in the B-rated Restaurants industry, DPZ is ranked #31.

Beyond what I’ve stated above, one can view DPZ ratings for Growth, Value, Stability, and Quality here.

Bottom Line

In September, U.S. consumer confidence took a substantial hit, reaching its lowest point in four months. Lingering anxieties about rising prices and the looming recession fears have cast a dark cloud over consumer sentiment.

Decreased consumer confidence often leads to reduced consumer spending. If people are worried about their financial stability, they may cut back on discretionary expenses like dining out or ordering pizza, which could affect DPZ’s sales and revenue.

Furthermore, DPZ’s revenue, which experienced a decline in the previously reported quarter, is expected to continue its downward trajectory in the to-be-announced quarter as well. In addition, the stock exhibits mixed profitability and elevated valuation multiples.

So, I think that investors might want to exercise caution and wait for a more favorable entry point in the stock.

How Does Domino’s Pizza Inc. (DPZ) Stack Up Against its Peers?

DPZ has an overall POWR Rating of C, equating to a Neutral rating. Other Restaurants stocks with an A (Strong Buy) and B (Buy) rating include Good Times Restaurants Inc. (GTIM), Biglari Holdings Inc. Class B (BH), and Rave Restaurant Group, Inc. (RAVE). For more Buy-rated Restaurant stock set to outperform, click here.

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DPZ shares were trading at $358.34 per share on Tuesday morning, up $8.20 (+2.34%). Year-to-date, DPZ has gained 4.60%, versus a 15.55% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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