Shares of the largest pizza company, Domino’s Pizza (NYSE:DPZ), spiked following its Q3 financials. Investors cheered the company’s better-than-expected domestic same-store sales. While the company is showing signs of improvement, near-term margin headwinds and pressure on earnings could restrict the upside in DPZ stock.
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What’s on the Menu for DPZ Stock
Domino’s stock closed about 10% higher after its domestic same-store sales of 2% in Q3 came in ahead of the Street’s estimates of 0.9%. Despite the jump, Domino’s stock is still down about 40% year-to-date. Despite the decline in DPZ stock, margin headwinds continue to act as a dampener and could limit the upside.
Investors should note that DPZ’s company-owned store gross margin slumped during Q3 (12.3% in Q3 versus 19.8% in the prior-year period), reflecting higher food and labor costs. Its food and labor costs increased by 4.1% and 1.7% in Q3.
In response to its Q3 earnings, BTIG analyst Peter Saleh said, “Domino’s posted a mixed quarter this morning, as better domestic same-store sales performance was not enough to offset outsized margin pressure, leading to an earnings miss.”
Saleh has a Hold rating on DPZ stock as he expects the company’s “earnings estimates could remain under pressure in the near-term.”
Is Domino’s Stock a Buy?
Wall Street remains cautiously optimistic about Domino’s stock. It has a Moderate Buy consensus rating based on nine Buy, eight Hold, and two Sell recommendations. Meanwhile, these analysts’ average price target of $390.44 implies 17.2% upside potential.
While analysts are cautiously optimistic about DPZ stock, hedge funds have a positive stance. TipRanks’ data shows that hedge funds bought 79.3K Domino’s stock last quarter. Meanwhile, insiders sold DPZ stock worth $5.4M. DPZ stock has a Neutral Smart Score of seven out of 10 on TipRanks.