Shares of Domino’s (DPZ) are falling more than 4% in pre-market trading Monday morning after a big miss on earnings.
The quick-serve pizza shop missed top and bottom line estimates by a wide margin, as same-store sales slowed to a crawl amid stiff competition in the fast-food industry and around pricing.
This isn’t just a minor stumble. Rather, it’s a big yellow flag that Domino’s is struggling to hold its ground in a savage fast-food market. U.S. same-store sales grew a anemic 0.4%, crushed by brutal competition from value meals at rivals like McDonald’s (MCD) and Restaurant Brands International’s (RBI) Burger King, while international same-store sales growth limped along due to macroeconomic woes and geopolitical chaos.
Domino’s vaunted “Hungry for MORE” strategy is what’s leaving investors starving. Its promise of 7% global retail sales growth and 8% operating profit growth are seem like hopium when Q4 delivered such measly results.
The company’s reliance on digital ordering and AI-driven logistics didn’t do the trick. It masks deeper issues like shrinking consumer demand and price sensitivity that’s driving customers away.
In particular, the earnings miss is a warning. It signals Domino’s faces short-term challenges with consumer demand and competition.
However, Domino’s core strengths – its scale, digital prowess, and franchise network – offer the pizzeria a foundation for recovery if management adapts quickly. The stock’s valuation is risky, trading at 27 times estimates and over 3 times sales, but its dividend and the fact Warren Buffett took a 2.38 million-share stake last quarter suggest long-term value for patient investors.
Investors should expect volatility ahead unless management can lay out a game-changing strategy during its earnings call. Moreover, if economic conditions improve over the coming year, and Domino’s executes on value and growth, it could turnaround this big, though so far one-time earnings miss.
Investors need to look for signs of a turnaround in consumer spending and same-store sales growth before jumping in.
