Labor Inflation Impacting Margins At Domino's Likely To Remain, BTIG Says

Domino's Pizza, Inc. DPZ reported its 1Q16 results with the EPS below expectations. BTIG’s Peter Saleh maintained a Buy rating on the company, while lowering the price target from $146 to $141.

Labor Inflation

Although Domino’s Pizza continued to witness robust sales momentum, it was offset by muted earnings.

“We were surprised by the degree of margin decline this quarter and commentary seemed to indicate the labor inflation that caused it would remain for the foreseeable future,” Saleh mentioned.

The analyst expects the sales momentum to remain robust, although sustained labor inflation was likely to continue to pressure margins.

1Q Results

Despite the same-store sales outperformance in 1Q16, the company reported Q1 EPS below the estimate and consensus, driven primarily by a decline in segment margins, along with increased FX headwinds and higher share count.

Domestic system-wide same-store sales grew ahead of the estimate, driven by a 4 percent increase at company units and 6.6 percent growth at franchise locations.

International comps also rose 7.9 percent, ahead of the estimated. “Management cited strong results worldwide with standouts including the U.K. and Mexico,” Saleh stated.

The EPS estimates for 2016 and 2017 have been lowered to reflect the labor outlook.