Investors weren't thrilled with Domino's (NYSE: DPZ) latest earnings report. Shares fell after the company announced results that showed surging profits and accelerating sales gains across key markets. Wall Street looked past these impressive metrics and focused on a few worrying trends, including reduced profitability and a slower store launch pace.
CEO Rich Allison and his team added context around these challenges in a conference call with analysts while sounding a positive tone in their long-term outlook for the business. Let's look at a few highlights from that presentation.
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The big picture
The pandemic continued to drive a favorable tailwind for food delivery coupled with the challenging operating environment.
The COVID-19 pandemic continued to push customers toward the convenience of home delivery, which is disproportionately lifting Domino's results. Sales growth sped up to over 17% in the core U.S. market from 16% during the fiscal second quarter.
It's a tough selling environment, though, as illustrated by the chain's reduced profitability. Domino's noted pressure from higher costs around wages, COVID-19 safety, and from the extra pressure on its supply chain.
At the same time, the pizza delivery leader is seeing increased competitive threats from Papa John's (NASDAQ: PZZA) and other rivals in the fast-food niche. In that environment, Allison said, Domino's needs to "focus on service as our category remains fragmented and customers often switch brands."
Getting to 25,000 stores
We are currently reassessing whether we will be able to achieve the timing of our previously articulated goal of having at least 25,000 stores opened by 2025.
Domino's notched a solid rebound in sales growth at existing locations in the international business and its 6% uptick was its fastest expansion rate there since late 2016. Yet there were clear signs of stress in its net store launch pace.
The chain permanently closed over 100 stores as franchisees struggled with difficult market conditions in places like India. Management said it's still optimistic about the international business and believe the company will reach its long-term growth goals eventually.
However, Domino's likely won't be adding stores at as fast a clip as executives had intended when they projected crossing the 25,000 mark by 2025. "I see this as a timing as opposed to a capacity matter," Allison said.
Plan of attack
We still have work to do on service levels, but I am very pleased with our execution in absorbing the unprecedented volume in both our stores and our supply chain centers.
Domino's sees an unusually volatile selling period ahead that might be marked by continued competitive pushes and weak economic growth in many parts of the world. That situation makes it more critical to focus on the things that separate the pizza delivery giant from its many fast-food rivals.
That's why the chain is aiming to reduce delivery times over the next few quarters with help from tech innovations and the addition of more locations even in mature markets. New menu launches promise to help here, too, and executives are happy with what they've seen with recent introductions like the chicken taco pizza and refreshed chicken wing offerings.
Domino's has another powerful growth driver available in marketing and promotions. Its 17.5% sales boost in Q3 was the fastest expansion rate in about a decade, and management made sure to highlight the fact that the boost wasn't supported by expensive promotions.
That success gives the chain some valuable resources it can use in the coming market share fight. "Underlying demand and our strong everyday value messages allowed us to focus on ... profitability and on service during the quarter," Allison explained.
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