EAT Brinker International Inc

Domino's Pizza Inc. (DPZ) reported second quarter 2011 earnings of 40 cents per share, which outpaced the Zacks Consensus Estimate by 4 cents and the year-ago quarter's adjusted earnings by 7 cents.

The upbeat result was attributable to higher international royalty revenues, international expansion and lower interest expense.

Inside the Headline Numbers

Total revenue increased 6.2% year over year to $384.9 million, comfortably surpassing the Zacks Consensus Estimate of $374.0 million. The growth was mainly driven by higher international and domestic same-store sales and expansion in the international market, partially offset by lower revenues due to the sale of 26 company-owned stores to a franchisee in the last quarter.

During the quarter, the company’s overall domestic same-store sales jumped 4.8% with company-owned units and franchises rising 5.3% and 4.8%, respectively, due to unit growth and higher traffic. The company had witnessed 8.8% domestic same-store sales growth in the year-ago quarter.

Same-store sales grew 7.4% in the international market. Global retail sales were up 14.5% or 9.6% excluding foreign currency impact, while international stores recorded a robust 25.6% growth and domestic stores spiked 5.0%.

The company’s operating margin expanded 110 basis points (bps) to 28.8% in the reported quarter, as cost of sales declined by the same magnitude to 71.2%.

Store Count

During the second quarter, Domino’s opened 13 and closed 28 domestic franchise stores, bringing down the total store count to 4,467.

At quarter end, the company had 427 company-owned restaurants in the domestic market. The company opened 88 stores and closed 16 in the international market. The company currently operates 4,542 international stores.

Domino’s Pizza remains optimistic on its international operations both in terms of sales and store growth. In this context, the company remains committed to opening 10,000 stores worldwide.

Financials

At quarter end, Domino’s Pizza had cash and cash equivalents of $78.6 million with long-term debt of $1,450.9 million.

During the quarter, the company repurchased and retired 1.7 million shares for $41.4 million.

Our Take

With the economy showing signs of improvement, we believe Domino’s will be able to maintain improved earnings momentum. Domino’s Pizza’s store level economics are strong and are driving store growth.

Moreover, the company’s growth model does not involve substantial investments as it utilizes the master franchise. Management expects to implement promotional activities and improve execution in its corporate and franchise stores. We expect estimates to go up in the coming days based on better-than-expected second quarter results. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $1.62 and $1.84, respectively.

One of Domino’s primary competitors, Brinker International Inc. (EAT) will reports its fourth quarter results on August 11, 2011.

Domino’s holds a Zacks #1 Rank, implying a short-term Strong Buy rating. We also reiterate our long-term Outperform recommendation on the stock.

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