Domino’s Pizza Builds Leverage: Analysts Raise Price Targets

Key Points

• Domino's Pizza controls what it can and builds leverage for investors in 2025.
• The company's earnings quality has improved, supporting a healthy dividend and share buyback.
• Analysts raised price targets following the 2025 guidance update, which are leading the market to higher price points. 

Domino’s Pizza NASDAQ: DPZ faces challenges and headwinds in 2025, but its results and guidance show that it can build leverage despite these obstacles. The Q1 results include system-wide growth and improved profitability, attributed to the Hungry for MORE strategy.

Guidance was reaffirmed, with strength expected in the back half. 

Strength will be aided by initiatives like the Parmesan Stuffed Crust Pizza, described as the most successful launch in company history, and a new deal with DoorDash. It is expected to be live nationally by the end of this quarter and drive a 50% incremental impact on delivery orders. 

The analysts' response says it all. The reactions are mixed, but the two reduced price targets are offset by over a dozen price target increases, and the fact that one of the reductions is to a level still well above the consensus.

The consensus of the new targets, excluding the outliers at the low and high ends, is just over $515, a 3% increase relative to the prior consensus and 5% above the pre-release close.

The revisions' increase to the high-end range, $560/$565, adds 10% and is sufficient to set a new multi-year high. In that scenario, the retail stock can continue to rally and will likely retest the all-time high before the end of the year. 

Institutional and short-selling trends also align with an outlook for higher share prices. The short interest increased steadily over the past several months to hit a multi-year high while institutions were buying. Institutions own about 95% of the stock and provide a bullish tailwind that the short-sellers will amplify as they cover positions.

The question is whether short sellers will reposition at a higher level, and the answer is maybe, due to the uncertain macroeconomic outlook. Domino’s reaffirmed its guidance but cautioned that macro factors outside its control could impact the results.

Domino’s Controls What It Can and Builds Leverage for Investors

Domino’s headwinds include FXN conversion, a reduced store count, and a pullback in U.S. comps, but they were insufficient to offset the growth in International markets. Net revenue was reported at $1.11, up 2.5% on a 2.3% increase in global retail sales. U.S. comps fell by -0.5% but were offset by a 3.7% FXN neutral gain in International sales.

On an FX-neutral basis, systemwide comps are up 4.7% and expected to grow as the business takes market share. The only bad news is that revenue fell slightly short of MarketBeat’s reported consensus figure, but it is a slim miss and easy to overlook. 

Margin news is also solid. A one-off impacting the results, but even so, the company’s nearly 19% increase in net income, 45% increase in cash flow, and 60% increase in free cash flow are impressive. Margin strength is partly driven by operational improvements and the post-COVID normalization of franchise advertising rates, which are expected to remain stable in upcoming quarters.

The bottom line is that GAAP earnings are up nearly 21% to $4.33, aided by a reduced share count. Earnings strength and share repurchases are expected to persist.

Share buybacks amounted to $50 million in Q1, reducing the count by 1.6% compared to last year. The buyback pace is expected to remain robust due to the remaining $764 million on the authorization and balance sheet health. The company carries debt and a shareholder deficit, but the debt is low, cash is ample, and the deficit is primarily due to buybacks and share retirements.

The deficit can be reclaimed; the improved shareholder leverage will last and aid the upward price action.