Richard Allison, CEO of Domino’s Pizza, speaks at CNBC’s Evolve conference in Chicago on Sept. 24, 2019.
Jeff Schear | CNBC
Amid growing competition from third-party delivery apps, Domino’s Pizza slashed its long-term sales outlook and reported quarterly earnings and revenue that fell short of estimates.
CEO Ritch Allison told investors that the company changed the outlook given “evolving market conditions and market uncertainty.” The likes of GrubHub and DoorDash have been putting pressure on Domino’s U.S. sales, but the pizza chain is betting that their business model, which involves luring customers with free delivery and deep discounts, is not sustainable.
Competitors Yum Brands’ Pizza Hut and Papa John’s have partnered with outside delivery networks, but Domino’s refuses to do so. Instead, it is building more U.S. stores to decrease delivery times and to steal market share from its rivals.
Allison told investors on the conference call that there is a “significant shakeout coming to the industry.”
Shares of the company initially fell in morning trading but then turned positive on Allison’s comments. The stock, which has a market value of $9.6 billion, was recently trading up about 2%. Shares are flat so far this year. Rival Papa John’s stock, valued at $1.7 billion, dropped 5% on Tuesday but remains up 29% in 2019.
Here’s what the company reported compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:
- Earnings per share: $2.05 vs. $2.07 expected
- Revenue: $820.8 million vs. $823.9 million expected
The pizza chain reported fiscal third-quarter net income of $86.4 million, or $2.05 per share, up from $84.1 million, or $1.95 per share, a year earlier. Analysts surveyed by Refinitiv were expecting Domino’s to earn $2.07 per share.
Net sales rose 4.4% to $820.8 million, falling short of expectations of $823.9 million.
The company reported that sales at U.S. stores open at least a year grew by 2.4%, but Wall Street was expecting same-store sales growth of 2.8%. It was the slowest quarter for U.S. same-store sales growth since the second quarter of fiscal 2012. Domino’s CFO Jeff Lawrence told analysts on the conference call that its U.S. same-store sales growth was driven “entirely by ticket growth.”
Domino’s also announced a new outlook for the next two to three years, which replaces its prior outlook for the next three to five years. It lowered its expected sales growth to a range of 7% to 10% from a previous range of 8% to 12%.
It also lowered its long-term forecast for both domestic and international same-store sales growth. The pizza chain now expects U.S. same-store sales growth in a range of 2% to 5%, down from a prior range of 3% to 6%. The outlook for international same-store sales growth was slashed from a range of 3% to 6% to a range of 1% to 4%.
“We find the timing of the new guidance introduction strange, as the company fiercely defended the prior 3-5 year range at the September 6th investor meeting,” Cowen analyst Andrew Charles wrote in note Tuesday morning.
Domino’s still expects net store growth over the next two to three years of between 6% to 8%.
Both Domino’s international and domestic businesses missed estimates for same-store sales growth during the quarter. The pizza chain, which is the largest in the world by sales, reported international same-store sales growth of 1.7%. Analysts were forecasting at least 2.9% same-store sales growth in its stores outside of the U.S.
In the third quarter, Domino’s added 40 net new stores in the U.S. “Fortressing,” its name for the strategy, presents the risk of cannibalization, but the company is betting on it for the long term. The pizza chain is also trying to grow its carryout business, which is now 45% of its orders.
Correction: An earlier version of this story misstated the growth rate in fiscal third-quarter sales, year over year.