Domino’s Pizza (NYSE: DPZ) continues to face challenges but is navigating the conditions well. The Q3 results show that the Hungry for MORE strategy continues to pay off, setting the business up for accelerating growth and leveraging bottom-line results when macroeconomic conditions improve for restaurant stocks. 

Due to falling interest rates, that may begin as early as the second calendar quarter of 2025. The FOMC has already cut by 50 basis points and may cut by another 100 before mid-year 2025, along with deep cuts from other G-7 central banks that will reinvigorate economic activity. Until then, Domino’s store count growth, deepening penetration of existing markets, cash flow, and capital return will drive shareholder value. 

Domino’s Sustains Margin, Grows Free Cash Flow in Q3

Domino’s Q3 results are mixed compared to analysts' expectations, with revenue falling short of the consensus and earnings above. The critical takeaways are that the revenue miss is slim at 180 basis points and offset by top-line growth, improved operating leverage, and solid outperformance on the bottom line. 

Revenue grew by 4.9% on a global, FX-neutral gain of 5.1%. Growth was even across the U.S. and International segments; however, comp gains and store count increases varied from region to region. U.S. comps came in at 3.0%, aided by increased advertising expenses, while International comps were light at 0.8%. The net new store count increase of 72 helped drive the growth, leaving the total store count up nearly 4% at the quarter’s end.

Margin news was mixed, with margin contracting compared to last year but far less than feared. The net result is $4.19 in GAAP earnings, which are up a penny compared to last year with the aid of share repurchases. The critical detail is that cash flow and free cash flow improved and helped sustain the capital return and balance sheet, and improvement is expected to continue sequentially. 

Domino’s capital return includes a dividend worth roughly 1.5%, with shares at a long-term low and share buybacks. The buybacks were nearly $200 million in Q3, reducing the average count by 1%. Because of the remaining authorization, cash flow, and balance sheet strength, repurchases are expected to continue robustly through year-end and in 2025. 

Better-Than-Feared Guidance Puts a Bottom in Domino’s Price Action

Domino’s guidance is also mixed, but the takeaway is bullish for the market. The revenue target for 2024 was trimmed by 100 basis points to an easily reachable 6%, while the earnings forecast was maintained.

Earnings are expected to grow by 8%, aided by another 4% increase in store counts, with similar expectations for 2025, sufficient to sustain capital returns and balance sheet improvements over the long term. If the relaunch of the Emergency Pizza deal for loyalty members goes as expected, the forecasts for 2025 are likely low.

Analysts have begun lowering their price targets for Domino’s stock but continue to see a 25% upside and show a high conviction in the target. The first revisions are from BMO Capital and Baird, which reduced their stock price targets to $510 and $535, both above the consensus of $505 with an average target of $522.5. The firms maintained their Outperform ratings; a move to $522.5 would align the market with the 2024 highs. 

Investors Buy the Dip in Domino’s Pizza 

Domino’s Pizza's share price fell nearly 3% following the earnings release, but the move triggered buying. The market quickly reversed, adding more than 2% at the high, confirming support at a critical level and signaling a high probability of reversing. The move is accompanied by above-average volume and bullish crossovers in the indicators that indicate a shift in market dynamics and a market with ample room to run higher. The critical resistance point is near $445, about 5.5% above the October lows, and may be reached before the end of the quarter.