Domino's forecasts slowing sales growth as delivery competition intensifies

Key Points
  • Domino's misses estimates for its third-quarter earnings and revenue.
  • The pizza chain also slashes its long-term sales outlook.
  • Domino's forecast for its net store growth remains unchanged.
Richard Allison, CEO of Domino's Pizza, speaks at CNBC's Evolve conference in Chicago on Sept. 24, 2019.
Jeff Schear | CNBC

As Domino's Pizza grapples with competition for its delivery customers, the pizza chain is expecting slower sales growth and accelerating its carryout business.

The likes of UberEats and Postmates have been putting pressure on Domino's U.S. sales by luring away its delivery customers with discounts and more fast-food options.

The Ann Arbor, Michigan-based company cut its long-term sales growth outlook on Tuesday, after falling short of estimates for its third-quarter earnings and revenue. Still, Domino's maintained its forecast for net store growth for the next two to three years as it continues to add more domestic stores strategically to decrease delivery times and increase its market share.

"We've got a unique opportunity right now to solidify market share gains for the long-term as our competitors retreat and as these third-parties fundamentally alter the economics of many players in the restaurant industry," CEO Ritch Allison told analysts on the conference call.

While Domino's refuses to partner with third-party delivery aggregators, competitors like Yum Brands' Pizza Hut and Papa John's have teamed up with GrubHub and DoorDash to boost their own delivery sales.

Domino's "fortressing" strategy also has the added benefit of growing carryout sales as the delivery side struggles. The more profitable carryout business accounted for nearly 45% of Domino's domestic sales during the third quarter, according to Allison.

Despite gains by the carryout business, Domino's CFO Jeff Lawrence told analysts on the conference call that its U.S. same-store sales growth was driven "entirely by ticket growth." 

The company reported that sales at U.S. stores open at least a year grew by 2.4%, but Wall Street was expecting same-store sales growth of 2.8%. It was the slowest quarter for U.S. same-store sales growth since the second quarter of fiscal 2012.

The pizza chain, which is the largest in the world by sales, reported international same-store sales growth of 1.7%. Analysts were forecasting at least 2.9% same-store sales growth in its stores outside of the U.S.

Net sales rose 4.4% to $820.8 million, but still fell short of expectations of $823.9 million.

Domino's reported fiscal third-quarter net income of $86.4 million, or $2.05 per share, up from $84.1 million, or $1.95 per share, a year earlier. Analysts surveyed by Refinitiv were expecting Domino's to earn $2.07 per share.

The company's new outlook forecasts the next two to three years and replaces its prior outlook, which had a longer range of three to five years.

"This is not a reactive decision, but a proactive one to make our guidance more meaningful and more relevant to our investors in light of the current competitive landscape," Allison said.

The pizza chain lowered its expected sales growth to a range of 7% to 10% from a previous range of 8% to 12%.

It also lowered its long-term forecast for both domestic and international same-store sales growth. The pizza chain now expects U.S. same-store sales growth in a range of 2% to 5%, down from a prior range of 3% to 6%. The outlook for international same-store sales growth was slashed from a range of 3% to 6% to a range of 1% to 4%.

Domino's still expects net store growth over the next two to three years of between 6% to 8%.

Shares of the pizza chain tumbled as much as 6% Tuesday morning but turned positive during the conference call. The stock, which has a market value of $10.5 billion, was recently trading up more than 5%. Shares are up 3% so far this year. Rival Papa John's stock, valued at $1.7 billion, sank 3% but remain up 31% in 2019. 

How Domino's is winning the pizza wars
How Domino's is winning the pizza wars

Correction: An earlier version of this story misstated the growth rate in fiscal third-quarter sales, year over year.