Domino's Pizza (DPZ) delivered continued growth in the first quarter of 2019, prompting the stock to jump 10% Wednesday morning (at the time of writing) but sales have slowed year over year. Domino's has been one of the strongest equities you could have over the past five years in terms of financial performance. My constant concern revolves around their balance sheet and what could happen if they do eventually experience a slowdown. There is a ton of debt here, and it will almost certainly bite DPZ stock unless the company can maintain the current momentum on the income statement. To that end, same store sales need to be monitored closely over the next few quarters.
Revenues grew 6.4% to $836 million in the first quarter; while operating income grew 7.5% to $322.3 million. Net income increased 4.3% to $92.65 million. The company has made a series of stock buybacks over the past year, and that combined with the higher net income resulted in a 10% increase in diluted earnings. Earnings per share were $2.20. In terms of estimates, the company beat earnings expectations of $2.09 per share, but came in well below revenue estimates of $849.6 million.
A lot of Domino's story comes down to sales for me. Year over year, same store sales growth did not deliver. Same store sales for U.S. stores increased 3.9% in the first quarter vs. 8.3% last year. Excluding currency impacts, international store sales increased 1.8% vs. 5.0% last year. Once again, if you exclude the impact of currency, total global retail sales grew 8.5% vs. 13.1% last year. Currency included, total retail growth was 4.6% vs. 16.8% the year before.
Factoring in 14 store closings, the company had net store growth of 200 locations in the first quarter. This certainly factored in to overall revenue growth, considering the slowdown in same store sales. Within food or retail locations, I always get nervous about the long term effect that occurs when new store openings are used to counter the fallout of old locations. Over the long term it limits potential while making things seems stronger than they are. It will take more than one or two quarters for this to become a clear trend, but it does beg the question of whether Domino's is losing steam.
Estimates seem to put the company's full year earnings at around $9.36 per share. If they can hit that level, the stock is trading at 31x full year earnings. Frankly I just think that's a big premium for a company with Dominos' balance sheet. The company has a total stockholder's deficit of $2.97 billion. Long term debt is $3.45 billion. That's not exactly a business you'd buy into if it's a private company, so what's the appeal of owning it as a public equity? That's where I'm at on Domino's. They've had big sales gains over the past few years, but the debts are so high that the gains haven't benefited total equity. Until they start displaying a setup where their income statement is benefiting the overall health of the business, I'm not sure the premium is worth it. My primary concern is that the momentum in sales is waning a bit. That could lead to a business with lower overall sales growth and the same big debt bill on the balance sheet. I'd rate Domino's a "hold" for now.