Stock Picks: DPZ Down, PIR Up

Investors held the extra toppings on Domino's Pizza (DPZ) when the food delivery giant beat earnings estimates but fell short on revenue expectations on Tuesday.

The Ann Arbor, Mich.-based company reported earnings of 31 cents a share, up from 17 cents a share in the year-ago quarter. The 76% hike in profit was driven largely by gains from retiring debt and improved international sales, the company said. Wall Street analysts, on average, expected earnings of 15 cents a share. For the quarter ended Sept. 6, revenue 6.5% to $302.7 million, but U.S. same-store sales were flat, an indication that consumer discretionary spending isn't getting back to cheese-stuffed crust levels.

"We continued to see domestic store closures with a net 30 stores closed this quarter," said Chief Financial Officer Wendy Beck on a Tuesday conference call. "These were a result of our efforts to eliminate weak operators but also a sign of the difficult economy over the past 18 months. Going forward, we see some easing of this and are seeing some improvements economically."

While Domino's was able to extinguish $71.8 million in debt during the quarter, leaving it with $1.6 billion in long-term debt, its performance is still a concern.

Mark Smith, an analyst at Feltl and Co., a Minneapolis boutique investment bank, said the absence of domestic sales growth is an issue for investors. "Our outlook on the shares remains muted due to the difficult sales environment," he wrote Tuesday. "Additionally, we are discouraged by more domestic closures than anticipated."

For the restaurant industry, the key will be when profits start coming from increased sales instead of cost cuts. Until then, investors will have mixed feelings about the fundamentals of recent stock gains, said Patrick Galley, portfolio manager of the RiverNorth Core Opportunity fund.

Bottom Line: Hold
It's a little early to make a bet on increased spending, and signs of increased sales may be a late delivery.

Investors took a remodeled look at Pier 1 (PIR) Tuesday, when the home furnishings company posted a surprise sales jump for September.

Shares were up 17% to 74 cents in midday trading after the Fort Worth-based home retailer reported a 9.9% increase in September same-store sales, compared to a decline of 11.7% in the same month last year.

Although Pier 1’s stock has come back from the precipice – its shares sank to 10 cents when the market hit its recent bottom in March – investors still don't think the shop 'til you drop ethos is back in the heart of the American consumer. According to ShortSqueeze.com, a web site that tracks the short interest on individual stocks, nearly 16% of its public float was held short as of Oct. 9.

That's high for any company, and will force investors who bet against the stock to unwind their positions in a hurry, creating a classic short squeeze that forces shares into a rapid price spike. Howard Davidowitz, chairman of New York-based retail consulting firm Davidowitz & Associates, said the September sales bump shouldn't convince investors Pier 1's ship has come in. While management has made some smart moves, like cutting real estate costs, Davidowitz points out that the sales spike could be the result of promotions or because only Pier 1’s best-performing stores are still open. "It's a company that's been closing stores for four years, and been in a constant wave of restructuring, in a massive way that you don't see in any other retail companies," says Davidowitz. "This is one good month."

Bottom Line: Sell
Take the money and shop elsewhere for solid retail growth.