EAT Brinker International Inc

Domino's Pizza Inc. (DPZ) reported third quarter 2011 adjusted earnings of 35 cents per share, which outpaced the Zacks Consensus Estimate by 2 cents and the year-ago quarter adjusted earnings by 8 cents.

The upbeat result was attributable to strong international and domestic performance.

Inside the Headline Numbers

Total revenue increased 8.3% year over year in the reported quarter to $376.3 million, comfortably surpassing the Zacks Consensus Estimate of $372.0 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 company-owned stores to a franchisee in both the first and third quarters of 2011.

During the quarter, the company’s overall domestic same-store sales jumped 3.0% with company-owned units and franchises rising 4.2% and 2.9%, respectively, due to unit growth and higher traffic. The company had witnessed 11.7% domestic same-store sales growth in the year-ago quarter.

Same-store sales grew 8.1% in the international market. Global retail sales were up 13.3% or 9.1% excluding a foreign currency impact, while international stores recorded a robust growth of 25.1% and domestic stores spiked 3.1%.

The company’s operating margin expanded 40 basis points (bps) to 27.5% in the reported quarter, as cost of sales declined by the same magnitude to 72.5%.

Store Count

During the third quarter, Domino’s opened 12 and closed 13 domestic franchise stores, bringing the total store count to 4,496.

At quarter end, the company had 395 company-owned restaurants in the domestic market. The company opened 116 stores and closed 8 stores in the international market. The company currently operates 4,650 international stores.

Domino’s Pizza remains optimistic about 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 $32.1 million with long-term debt of $1,450.7 million.

During the quarter, the company repurchased and retired 3.2 million shares for $81.9 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 growth.

Moreover, the company’s growth model does not involve substantial investments as it utilizes the master franchise structure. 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 third quarter results. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $1.62 and $1.83, respectively.

One of Domino’s primary competitors, Brinker International Inc. (EAT) will reports its first quarter 2012 results on October 26, 2011.

Domino’s holds a Zacks #2 Rank, implying a short-term Buy rating. We also reiterate our long-term Outperform recommendation on the stock.

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