Domino's shares in bargain territory but pizza firm battles rising costs

After posting a quarter of comparable sales decline, investors are looking to see how the comfort food chain can deal with higher costs and more price-conscious eaters.
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Challenging environment

During the last quarter, the chain's CEO Russell Weiner outlined the larger challenge for the company: employment. Getting enough drivers for deliveries became an unexpected obstacle for the chain that has opted to challenge delivery apps with its own-named app. With the latest NFP showing that the labour market remains tight, this could be a potential obstacle going into the final quarter, which is the most important for the company's sales.

Ahead of the earnings release, Morgan Stanley, RBC, and Wedbush cut their price targets. But they affirmed either neutral or positive ratings for the company. The main concern is margin compression, questioning whether the company will be able to pass on to consumers higher energy costs, which are expected to continue over the winter.

Going beyond domestic performance

The expansion in international markets offset less than stellar domestic performance, with virtually all new stores opened overseas in the prior reporting quarter. The company has compensated for lower same-store sales by increasing its reach and acquiring new customers with promotion activities. While this might leave investors a little less happy in the short term, it could set up the company for a better rebound after the current economic uncertainty is resolved.

Traders will likely focus on any comments around hiring and actions taken to offset costs. While store openings are usually an important metric, investors could be more interested in results for the coming quarter. Domino's is expected to report earnings of $2.97B, a marginal increase
over the prior quarter but less than the preceding year. Sales are expected to be broadly flat quarter-over-quarter at $1.1B

DOM in a falling wedge

The price of Domino's Pizza has been spiralling to the downside, forming lower lows and lower highs. The structural resemblance of the down-sloping contracting trendlines hints at a falling wedge. A potential slide below the 216 support (S1) might complete the distinct pattern, offering
a reversal or a major selloff.

Momentum has been diverging with the price, showing a bullish bias. If the subsequent lower low sees a rapid increase in long bets, the breakout of the upper trendline might expose 260 (R2). The swing resistance of 235 (R1) could act as confirmation, especially in the case of a trendline retest. However, if the price falls below the lower trendline support, the falling wedge might get invalidated. As such, prices could slide towards the 200-round number (S2) support before providing more directional clues.

Key Takeaways

Domino's faced a major employment challenge that might appear in the company's sales again as the labour market remains tight and drivers are harder to find. However, the company is expanding its international store operations to counterbalance lower domestic sales.

Customer acquisition through promotions may not please investors in the short term but could be beneficial in the long term. Analysts are primarily concerned about margin compression, questioning whether the firm can pass on expected higher energy costs to consumers. But investors and analysts will be keen to hear comments about hiring and cost-reducing actions.