Domino’s (NYSE: DPZ) had to settle for good enough in the restaurant chain’s latest earnings report. The pizza delivery leader announced its fourth straight quarter of slowing growth in the core U.S. market, while international sales gains significantly trailed management’s targets.
On the other hand, profitability and market share expanded, and the company continued the aggressive global store expansion pace that is making it one of the fastest-growing restaurants on the market.
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In a conference call with Wall Street analysts, CEO Richard Allison and his team discussed those encouraging wins along with their plans to accelerate the business over the coming quarters. Below are some highlights from that presentation.
The bigger picture
The chain’s 3.9% comparable-store sales increase in the U.S. marked its fourth consecutive slowdown from the 8% boost Domino’s achieved a year ago. Since then, growth has moved closer to the low end of management’s long-term forecast of between 3% and 6% annual gains.
Executives were encouraged by the comps growth, though, especially since it occurred on top of last year’s spike. Gains are also being held back by its “fortressing” strategy, which sees the chain add more stores in the sales footprint of established locations. Despite these challenges, the combination of more stores and higher sales at existing locations pushed revenue higher by 8%.
International issues
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International sales gains at existing locations dipped to 2%, compared to 5% a year ago. This performance continued a string of disappointing results in a few key markets that haven’t responded to management’s attempts to stabilize the business since mid-2018. Alison said franchisees in several European and Pacific region markets “have work to do to better align our value proposition with local customers.”
He stressed that the business economics remain healthy, and highlighted the 173 new stores launched in outside markets during the quarter. Yet investors can’t be sure at this point that the segment will bounce back to meet management’s broader goal of between 3% to 6% growth in 2019.
Financial wins
Domino’s had nothing but good news to report on the profitability front, as operating margin ticked up to 38.6% of sales from 38.2% despite rising food and labor costs. The company will book a one-time gain from the sale of 59 New York-based locations to franchisees, meanwhile, which will also help lift profitability as the chain trades food sale revenue for high-margin royalty and franchise fees.
The fast food giant’s franchise-level returns, a metric management considers one of the most important in tracking the health of the business, is showing no signs of stress. Instead, the average U.S. franchisee booked almost $1 million of adjusted earnings last year, or roughly triple the rate since Domino’s started its fortressing strategy in 2012.
That success gives management plenty of confidence to continue the market-share-protecting fortressing initiative, even as it pressures short-term sales growth through 2019. Domino’s has good data to back up the prediction that the strategy is the right long-term play in this competitive industry.
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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
