At first glance, rising revenue for fast-food giant Domino’s Pizza (DPZ) seemingly bodes well for not only the company but for the wider economy. With people willing to fork over money for takeout rather than cook themselves (and thereby save money in the process), it’s natural to get excited about the new year. However, the counterintuitive thesis – that rising demand could be an economic harbinger – forces at least some reflection.
To be sure, Domino’s Pizza has been resilient throughout the initial impact of the COVID-19 crisis and the subsequent new normal. In 2019, the company posted revenue of $3.62 billion, representing a solid gain of 5.4% against the prior year’s tally. Remarkably, though, following a devastating global health crisis, Domino’s rang up top-line sales of $4.12 billion in 2020. That came out to a 13.8% lift from 2019’s result.
It wasn’t the end of the extraordinarily development. In 2021, Domino’s posted $4.36 billion on the top line, representing a near-6% lift from the prior year. And on a trialing-12-month basis, the company is looking at revenue of $4.49 billion. If this figure holds (or even rises), then Domino’s would end up posting year-over-year growth of at least 3%.
In a year in 2022 characterized by soaring inflation and still ongoing global recession fears, continuing to post sales growth is again a remarkable achievement. Therefore, it’s no surprise that interest in call options for DPZ stock jumped recently.
On balance, the narrative certainly appeals to hard-hit investors looking for respite in the storm. However, it also brings up concerns. Essentially, the very notion that Domino’s is experiencing a sales lift suggests a recession may be on the horizon.
Yes, people who need to save money tend to cook at home. However, Domino’s may also represent a trade down from far more expensive fare. That’s why investors need to be cautious about its recent swings in the derivatives market.
DPZ Stock Attracts Unusual Stock Options Volume
After the closing bell rang out for the Jan. 20 session, DPZ stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This stat shows the difference between the current volume and the average volume over the past month. Typically, traders use this data to determine which stocks may be due for big moves ahead.
Specifically, DPZ’s volume level reached 12,678 contracts against an open interest reading of 48,773. Call volume hit 8,954 contracts versus put volume of 3,724. Further, the delta between the trailing-month average total volume versus the prior session volume came out to 317.31%. The implied volatility (IV) rank hit 38.69%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.
To summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.
The IV low for DPZ stock was 23.42% on Aug. 8, 2022. Two months later on Oct. 12, 2022, DPZ hit its IV high of 50.53%. Prospective investors should note that per Barchart.com’s technical analysis gauge, DPZ ranks as an average 56% sell. Though sentiment is somewhat contested, across the time spectrum (short, medium and long term), DPZ clearly tilts bearishly.
Currently, though, analyst sentiment moves toward the bullish zone. Three months ago, Wall Street experts pegged DPZ stock a “hold,” breaking down as six strong buys, one moderate buy, 15 holds and two strong sells. In the current month, the consensus rating moved up to “moderate buy,” breaking down as seven strong buys, two moderate buys, 11 holds and two strong sells.
Finally, while DPZ stock didn’t perform well in 2022, its 60-month beta sits at 0.75, demonstrating considerably lower volatility than the benchmark equities index.
Economic Insulation Has a Downside
Though the price action for DPZ stock has been found wanting lately – particularly with shares down nearly 24% in the trailing year – rising annual revenues seem to offer a substantively positive narrative. Still, it might not be a perfectly holistic one.
Back during the Great Recession, ABC News pointed out that pizzerias were thriving. “It's such a cheap meal – a large pizza for a family of four is an easy indulgence,” stated comfort food expert Brian Wansink at the time, professor of marketing at Cornell University and author of “Mindless Eating: Why We Eat More than We Think.”
Further, Nation’s Restaurant News mentioned that “[t]he pizza industry has proven both pandemic- and recession-proof, with sales in the U.S. alone topping $55 billion in 2022.” Undoubtedly, the broader framework for DPZ stock is enormously positive.
Still, it’s very possible that Domino’s success is hiding losses in the premium restaurant segment. For instance, Ruth’s Hospitality (RUTH) is finally on pace to post an annual revenue tally that would exceed its result for 2019. However, problematic headwinds such as record credit card debt may force consumers to unwind their discretionary purchases, thus boding poorly for premium brands like Ruth’s.
Ultimately, stakeholders of DPZ stock might not care, simply being happy that the underlying financial performance implies potential upside in the charts. However, Domino’s success might translate to brewing difficulties for everyone else.
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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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