Investors are applauding Domino's Pizza after the company reported better-than-expected quarterly earnings and same-store sales that weren't as bad as Wall Street had feared.
Shares of the company jumped more than 7.5% in Wednesday afternoon trading. The stock, which has a market value of about $12 billion, is up 25% over the last year.
"It was a good quarter for our U.S. business, and I am very pleased with our balanced retail sales growth, driven by a healthy combination of solid same-store sales and unit growth," Domino's CEO Ritch Allison said in a statement.
Still, sales at stores open at least a year across both its U.S. and international divisions missed analysts' expectations.
Here's what the company reported compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:
- Earnings per share: $2.20 vs. $2.09 expected
- Revenue: $836.0 million vs. $849.6 million expected
- Same-store sales growth: 3.9% vs. 4.22% expected
Some have pointed to the company's "fortressing" strategy as the reason. Under the strategy, stores are added to existing markets to be closer to customers, making deliveries faster and to increase driver tips. Skeptics argue that Domino's aggressive expansion leads to cannibalization, negatively impacting same-store sales growth. With the rise of third-party delivery services, the pizza chain has not only been battling for customers from rivals Pizza Hut and Papa John's, but also every restaurant using Uber Eats, DoorDash and GrubHub.
CFO Jeff Lawrence told analysts on an earnings conference call that "aggressive marketing from third-party aggregators" put pressure on domestic same-store sales. DoorDash and Uber Eats launched their first national advertising campaigns during Domino's first quarter, and restaurants like Chipotle Mexican Grill ran promotions for free delivery for a limited time.
"It's hard to imagine that the current approach is sustainable over the long term. But we don't know. We'll have to see how that plays out," Allison said. "What's clear for us is that our strategy has to remain the same, and that's to continue to fortress the markets that we operate in."
Domino's reported U.S. same-store sales growth of 3.9%, but Wall Street was expecting the company to report domestic growth of 4.22%. Outside of the U.S. and excluding the impact of foreign currency, same-store sales increased by 1.8%, less than the 2.43% anticipated by analysts.
Still, Domino's same-store sales were better than some analysts' pessimistic predictions.
"Franchise comps of 4.1% were in line with [consensus] and towards the high end of buyside whispers (2-4%)," Bernstein analyst Sara Senatore wrote in a note.
Domino's reported fiscal first-quarter net income of $92.7 million, or $2.20 per share, up from $88.8 million, or $2 per share, a year earlier. Analysts surveyed by Refinitiv expected the pizza chain to earn $2.09 per share.
Net sales rose 6.4% to $836 million, missing expectations of $849.6 million. The company attributed the growth in sales to higher same-store sales and more locations, as well as higher supply chain volumes from higher retail sales.
The company said in January at its investor meeting that it wants to reach 25,000 global locations by 2025. Domino's opened its 16,000th store during the first quarter. The company also reported global net store growth of 200 locations, with the majority of openings occurring overseas. Only 4 U.S. stores closed during the quarter, Allison said.
Heading into the quarter, analysts were largely optimistic. J.P. Morgan and Morgan Stanley upgraded the stock, citing its attractive valuation relative to slower growing peers. However, Cowen analyst Andrew Charles warned in a research note that Domino's 2019 store openings — part of its fortressing strategy — could be off to a slower start based on the company's franchise disclosure filing.