Domino’s Growth Story Is Getting Stale

Domino’s Growth Story Is Getting Stale
Domino’s Pizza cut its long-run growth outlook, but its stock still trades at a premium to the S&P 500. Photo: Gene J. Puskar/Associated Press

Domino’s Pizza DPZ 4.65% shareholders, for now, are able to digest bad news.

The world’s largest pizza chain reported quarterly sales of $821 million, same-store sales growth of 2.4% and adjusted earnings of $2.05 a share, all of which were slightly below consensus analyst estimates. Domino’s also cut its long-run growth outlook.

The company now expects annual U.S. same-store sales growth of 2% to 5% over the next two to three years. It previously had guided for 3% to 6% growth over a longer time frame of three to five years. The guidance for international growth was lowered and shortened as well.

A tougher competitive environment is to blame for the expected slowdown. The expansion of third-party food delivery providers such as DoorDash, Grubhub and Uber Eats means that consumers have more options to order food than ever before. Dominos finance chief Jeffrey Lawrence cited “aggressive competitor activity” on a Tuesday investor call. Analysts at Morgan Stanley estimated back in August that 20% to 25% of Domino’s sales are either to markets where third-party delivery is active or where it may soon expand.

Domino’s, hyped by analysts as a “technology company,” is turning to an old-economy solution to defend against these industry changes: It is expanding store counts. That will help deliver food more quickly and protect against upstart competition, but likely comes with a trade-off of lower comparable sales growth over the long term.

The pizza chain on Tuesday also announced a $1 billion share repurchase authorization, which would account for more than 10% of the company’s current market value. Shares rose nearly 5% on Tuesday but are still down about 9% over the past year.

Still, even after the lowered guidance, shares trade at a very rich 24 times forward earnings, according to FactSet. That is a significant premium to the S&P 500, which trades at about 17 times earnings.

Investors should consider waiting for this pie to cool down.

Write to Charley Grant at [email protected]

Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Submit a Comment

Captcha image