Domino’s Stock Falls After Revenue Misses Estimates

“The U.S. delivery business continues to be challenged,” said Sandeep Reddy, Domino’s chief financial officer, in a call with investors.

Same-store sales for food deliveries declined 3.5% in the second quarter, Reddy said, adding that the company expects same-store sales to be equally weak in the third quarter before improving in the fourth quarter.

The shares initially fell 4% to $369.90 in premarket trading following the release. They opened close to 3% higher, fell back into negative territory, and then rebounded for a 1% gain to $389.28 in mid morning.

Wall Street had been getting much more bullish on
Domino’s Pizza
ahead of the earnings report. Fans of the stock still found much to like in Monday’s earnings report.

For one, margins improved in the quarter. Gross margin was 39.5%, up from 36.3% a year earlier, partly because of price increases across the U.S. The average price increase in the U.S. was 3.9%, management said in a call with investors, adding that they expected the average pricing to be similar in the third quarter before growth moderates to about 2% toward the end of the year. Costs have also gone down as commodity prices have fallen in recent weeks.

“We were pleased with better than expected margins,” wrote TD Cowen analyst Andrew Charles in a Monday note to clients. Charles has a Market Perform rating and $330 price target on the stock

Domino’s also said it would launch a “new and improved” loyalty program in the U.S. starting in September, targeted at delivery customers. The company expects the move to boost same-store sales in the fourth quarter.

That follows other steps Domino’s has taken to build up its delivery business. The company said earlier this month that U.S. customers will be able to place orders through
Uber
(UBER) Eats and Postmates apps later this year.

Wall Street has responded well. Since Domino’s unveiled the partnership with Uber, at least a dozen analysts have boosted their price targets for the stock.

Last week,
Stifel
analyst Chris O’Cull raised his price target for Domino’s stock to $450 from $350. The partnership with Uber Eats could boost sales growth for the next three years, he wrote, noting the company will likely partner with
DoorDash
(DASH) as well when its exclusive deal with Uber expires in 2024.

Similar deals in the past suggest that Domino’s could see sales increase in percentage terms by mid-single-digits, according to BTIG analyst Peter Saleh.
Papa John’s
(PZZA), for example, launched a partnership with
DoorDash
(DASH) in 2018. Two years later, third-party platforms accounted for 7% of sales.

“We see no reason why Domino’s can’t experience a similar mix with UberEats as the partnership rolls out nationally,” wrote Saleh last Wednesday, lifting his target for the stock to $465 from $400.

Bank of America analyst Sara Senatore, who also raised her price target for the stock to $465 from $415 last week, estimates that the Uber Eats partnership could boost Domino’s same-store sales by 6% in its first full year. 

Domino’s CEO Russell Weiner told The Wall Street Journal earlier this month that the chain and its operators aim to generate $1 billion in new sales by listing menus on Uber’s apps. Stifel’s O’Cull estimates that could equate to $45 million in annual Ebitda, or $1 in earnings per share.

Profit margins for Uber Eats orders will likely be more attractive, wrote Senatore. Third-party platforms often sell at menu price, while direct orders from Domino’s tend to have a roughly 20% discount. While Domino’s will need to pay Uber for being listed in the app, national brands often pay much lower fees than independent restaurants.

Domino’s shares have been tumbling since hitting a record high in December 2021. Sales have been stagnant as high inflation left consumers with less money to spend at restaurants. A labor shortage meant there were fewer drivers available to deliver orders for takeout food.

But the picture appears to be improving as commodity prices have started coming down. Historically, every 40-cent change in the price of cheese could move restaurant margins by one percentage point, wrote Saleh. In the second quarter, block cheese prices declined 71 cents on average from the prior year. 

Improving profitability, in turn, could help Domino’s compete in the tight labor market to retain and attract more drivers.

“We believe an acceleration in sales, coupled with commodity deflation and improved labor availability, should be the catalyst for franchisee profit recovery this year, accelerated domestic development, and ultimately, a much higher share price,” wrote Saleh.

Although Domino’s shares are now about 32% below their record high, the stock is still trading at 30 times earnings—just slightly cheaper than peers like Papa John’s,
McDonald
‘s (MCD), and Yum! Brands (YUM), which owns Pizza Hut. But if the 2023 and 2024 earnings growth comes to fruition, as many analysts have forecast, the stock could have a nice run. 

Write to Evie Liu at [email protected]