Source: Domino's Pizza.
Costs for cheese, meats, and other toppings have been rising
faster than thick-crust pizza dough in a 500-degree oven. Despite
the higher food bills, shareholders of
continue to see their slices of the company pie climb to
mouthwatering levels as the company delivers record profits
seemingly as easily as it delivers the meat lovers' special.
How can the pizza king cope with this?
On a per-block basis, cheese prices have risen from $1.77 per
pound in Q2 2013 to $2.20 per pound in Q2 2014. The farm industry
is still suffering from a 2012 drought that left cattle feed in
The domino effect has been higher price of feed, which has led
to farmers cutting back on cattle rearing. This has resulted in a
shortage of cows, which means a shortage in cow's milk and of
course a shortage of cheese.
Supply and demand came into play, and now we're
all facing higher cheese prices. Luckily for Domino's, there
is more to a pizza than just cheese.
While many other commodity prices, such as pork and beef, have
risen too, certain other items actually got cheaper.
However, the overall basket of commodities for Domino's rose 5.8%
in the second fiscal quarter according to the company's most
recent conference call.
Source: Domino's Pizza.
The delicious results, costs be damned
In Domino's Pizza's second-quarter fiscal earnings results,
reported on July 22, the company reported total revenue that
popped 8.8% year over year. Same-store sales rose 7.7%
domestically and 11.7% internationally.
Earnings per diluted share tacked on 17.5%. Both gross and net
profit margins remained roughly the same percentage.
The numbers certainly don't suggest any obvious major problems
with commodity costs holding Domino's Pizza back. Domino's Pizza
expects between 4% and 6% commodity price inflation in total for
CFO Michael Lawton stated, "We believe that this increase is
manageable in the overall context of our business."
How Domino's Pizza manages the seemingly
Domino's Pizza sells many of the required ingredients directly to
the franchisees. The franchisees are the ones who ended up eating
all of the higher costs, not the parent company.
Franchisees pay a royalty fee to Domino's Pizza based on a
percentage of sales regardless of their profits. According to the
company's annual report, this royalty fee is generally 5.5% of
retail sales no matter what the input cost.
If a franchisee raises his menu prices in response to higher
bills, Domino's Pizza still gets its 5.5% except that 5.5% is of
that higher menu price while it shares none of the cost.
With price increases, franchisees maintain their profit
margins and everybody wins including the parent company.
Since over 97% of its 11,000 restaurants are franchise-owned,
it's a good to be the pizza king.
For the other less than 3% of restaurants that are
company-owned, Domino's Pizza aims to pass the higher commodity
costs onto consumers in the form of higher retail prices.
In most cases, however, it actually doesn't even have to. CEO
Patrick Doyle explained during the conference call, "With food
costs where they were in the first half [of the year you saw]
that volume growth has offset increases in food costs."
Digital ordering has largely been credited with for the
Source: Domino's Pizza
Higher demand and higher economies of scale largely
neutralized the higher costs. There is much more that goes into a
pizza, such as labor and energy, and with higher volume those
costs get sliced thinner on a per-pizza basis.
Nobody likes higher prices, and Domino's Pizza isn't crazy about
them either. Doyle stated that the company would be happier if
cheese costs and pork costs were cheaper as it would allow for
menu prices to be lower as well. He was implying this would
stimulate even more demand among price-sensitive customers.
However, Doyle doesn't see it as a long term issue and neither
should investors. In short, cheese and meat prices may continue
to escalate, but that should carry little to no weight for any
Foolish analysis of Domino's Pizza stock, as it has little to no
negative effect in the long term or even the short term.
Leaked: Apple's next smart device (warning, it may
Apple recently recruited a secret-development "dream team" to
guarantee its newest smart device was kept hidden from the
public for as long as possible. But the secret is out, and some
early viewers are claiming its everyday impact could trump the
the iPad. In fact, ABI Research predicts 485 million
of this type of device will be sold per year. But one small
company makes Apple's gadget possible. And its stock
price has nearly unlimited room to run for early-in-the-know
investors. To be one of them, and see Apple's newest smart
Why Domino's Pizza Has No Fear of Rising Cheese
originally appeared on Fool.com.
has no position in any stocks mentioned. The Motley Fool has no
position in any of the stocks mentioned. Try any of our Foolish
free for 30 days
. We Fools may not all hold the same opinions, but we all believe
considering a diverse range of insights
makes us better investors. The Motley Fool has a
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a