Domino’s Crashed 11%, Buy the Dip?

Domino's fourth-quarter earnings disappointed investors, but there were some potential positive signs for the company.

Bad News First

Following its earnings release, Domino's was the worst performer on the S&P 500 that day, and the share price has remained under pressure since. Although the company reported both top and bottom-line growth, what investors found disappointing was the slowing of the pace of the growth. Worse, the company had a pretty downbeat outlook, suggesting the trend might continue. Not surprisingly, the share price tanked 11% last Thursday.

The main issue was delivery, as consumers feel the pinch of inflation and aren't as willing to pay the additional cost. Delivery fees are set by the local franchisee, which is added on top of the
increasing price from higher ingredient costs. The company also hinted at the problem of getting enough drivers for delivery. By comparison, rival Papa John's came above the average of estimates, but its stock price still suffered. Investors may not have as much confidence in the Pizza model, beset by increasing competition in the delivery space.

How Cheap is Good?

After the sell-off, investors might consider that the lower share price offsets the cut in guidance. The company doubled its dividend, increasing the estimated dividend yield to 1.6%. Recently, Domino's has been stingy with its dividends, so even with the increased payout, it is still only disturbing about a third of its net income, implying that it can keep raising dividends to keep shareholders happy.

There were some positives in the earnings report, as well. EPS increased by 4.2% compared to the prior year, despite global sales increasing at a comparable rate of 0.9%. And the company expects this trend to continue by reducing costs and expanding its profit margin. Despite cutting its outlook for next year to 4-8%, that's still above the 3.9% growth it managed last year.

Domino's outperformed in the previous years of covid-induced turbulence, which might have left traders a little over-confident in the stock. The latest earnings might have simply brought the price back to reality.

Dominoes in Wedge Pattern

As obvious as it may be, Domino's stock price remains under pressure. But the pattern under potential formation implies a reversal may be due soon. Wedges typically see rejections at the contracting trendlines, which brings the $270 area into the spotlight. Without a move above the $300 handle, however, it will be hard to experience any sort of respite. If bulls manage to retake
control of the round level, $321 becomes the next level of resistance. Only breaking higher would increase the chances of a full-blown reversal, with $396 and $427 returning to the bulls; radar. Otherwise, losing the lower trendline might open the door to $250 and even lower.

Key Takeaways

Domino's fourth-quarter earnings disappointed investors, causing the share price to drop 11%. The downturn was attributed to delivery costs and competition in the pizza delivery space. Despite this, the company still managed 4.2% year-on-year EPS growth, with a raised dividend yield of 1.6%. There is optimism that cost reduction, and profit margin expansion may help the company achieve 4-8% growth for next year.