DOMINO’S REPORTS Q2 – STOCK DOWN 10, THEN UP 10, WHAT’S GOING ON??

Domino’s Pizza (DPZ) reported second quarter earnings this morning, missed same store sales expectations slightly, lowered comp guidance by about 1 point, as well as expectations for earnings growth. The stock sold off by about 10 points early on Tuesday, then recovered to be up by the same amount by early afternoon.

The reason for the decline is obvious: analysts and investors don’t like it when companies lower expectations. The rationale for the quick rebound in price is of more interest to us, as well as the commentary about the delivery market in general.

DOMINO’s IS NOT ABOUT DELIVERY (ALONE)

Domino’s has, in the past, only described the carryout business as “significant” and “growing”. Especially in light of the following comments regarding the delivery segment, DPZ management felt it desirable to assure investors that Domino’s is not (only) about delivery, and we suspect that is why the stock has so quickly recovered. In fact, within an interview on CNBC, management mentioned “carryout” seventeen times and disclosed (perhaps for the first time) that carryout orders (no doubt with a lower ticket) are approaching forty five percent of the total orders within the US, obviously VERY SIGNIFICANT. This is an outgrowth of their expansion of the “Modern Pizza Theater” format introduced in 2013, as well as the attendant focus on ease of use for carryout customers. We’ve noticed that, just in the last day or so, an advertisement offered a “large two topping pie for $5.99 for carryout customers this week”, an offer too good to refuse. Domino’s is obviously willing to be very aggressive pricewise if the customer doesn’t hang out (by dining) on their real estate, and there is no delivery expense.

IT’S “HITTING THE FAN” IN THE DELIVERY BUSINESS

Management’s conservative guidance over the next several years is largely the result of competition on the delivery side of the business. According to DPZ management: “we are starting to see some QSR competition receiving deals that are very favorable to the restaurant…whether or not the third party providers can sustain that level is a theoretical question…..we don’t have visibility into exactly how long these new entrants…are going to benefit from the financial support of aggregators who are seeking to buy market share…pricing below the cost to serve, offering free delivery or other deep discounts that are currently enabled by investor subsidies”. We can add that time is running out for the 30% type fees charged by Doordash and the others, already at 20% and coming down, we hear. Grubhub reported “adjusted EBITDA of $54.7M in the June quarter, down from $67.4M a year earlier. Anecdotally we’ve been told that Grubhub/Uber/Doordash drivers are increasingly dissatisfied with their net pay after expenses. It all amounts to a predictable shakeout in the third party delivery space which will amount to somewhat better news for restaurant operators. Of course, one way or another, the customer is paying for the delivery service, and no doubt that is no doubt contributing to the growth of Domino’s carryout business.

OTHER NEWS OF NOTE FROM DOMINO’S

Domino’s is offering, for the first time, 20% off orders after 9pm. We can call it “surge pricing in reverse”, and it stands to reason that incremental business at slow day parts is worthwhile. The store is sitting there, the lights are on and the oven is fired up. The business is incrementally profitable even at 20% off. In between innings or at half time I can run down to Domino’s and pick up a large pizza for under $5.00: makes a lot of sense.

There are now twenty three million active users in the loyalty program, and eighty five million active users of the Domino’s brand. It would be a mistake for operators within the pizza segment to not pay close attention to what is happening at DPZ.

Roger Lipton