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Domino's same-store sales growth slows

The pizza chain's 4.2% U.S. same-store sales were the lowest in four years as store count accelerates.

Domino’s Pizza’s same-store sales rose 4.2% in the U.S. in the fourth quarter ended Dec. 31, the company said on Tuesday, in a relative slowdown the chain’s executives blamed on tough comparisons and a big increase in the number of units.

The results were nevertheless the slowest for the chain in four years, a remarkably strong run for the Ann Arbor, Mich.-based pizza chain in which its same-store sales averaged close to 10%.

The results were lower than investors expected, and the company’s stock fell more than 2% in morning trading on Tuesday. Investors worried that competition from other restaurants’ delivery services is eating into Domino’s market share.

Yet Domino’s CEO Patrick Doyle, who will cede his position to Richard Allison in June, said that the results were in line with the company’s own expectations.

“We feel really good about it,” Doyle said during the company’s fourth quarter earnings call. He said the company was comparing itself to a 12.2% increase in the same period a year ago, and the chain also added locations. Domino’s same-store sales growth was its 27th straight quarterly increase in the U.S.

Domino’s added 216 domestic locations in the U.S. and added another 829 in international markets to give the pizza chain 14,856 total units worldwide.

With system sales of nearly $5.9 billion in the U.S. last year, the company is now larger than rival Pizza Hut—making it the country’s biggest pizza concept.

The company’s unit growth also came as a relatively small number of locations closed. Executives said there were only 13 closures in the U.S. in 2017, and 62 worldwide, for 75 closures total—the lowest number in more than two decades.

Doyle called closures “a key and underrated metric measuring stability and potential within the business.”

He said that improving unit economics, after several years of strong same-store sales growth, made it much less likely that franchisees would close locations. And it gave operators more incentive to build additional locations even as many of them spent money to remodel their stores.

“The return on investment for franchisees is better than it’s ever been,” Doyle said, “which is driving the energy behind expansion.”

Domino’s same-store sales grew 2.5% in international markets; it’s been 24 years since the chain’s overseas locations had a decline. International same-store sales have come with “a bit more volatility than usual,” Doyle said, “but we’re confident the business will continue to deliver strong top line results.”

Some markets, particularly in Asia—and Japan most specifically—had weak quarters. But Doyle did tout the chain’s success in India, which he said contributed to the decision earlier this year by rival Papa John’s to exit the market.

“Our unit economics encouraged rapid growth, making it extremely difficult for others to get a foot in the door,” Doyle said.

Back in the U.S., the company has continued to invest in technology to make ordering and delivery easier. Doyle said that voice ordering, through services such as Amazon’s Alexa, have become more popular in recent months.

The company also started working on delivery using self-driving vehicles. And Doyle vowed to continue experimenting and adding new services, citing the chain’s recent increase in the fee it charges operators for the technology.

“We are the technology disruptors,” Doyle said. “We will invest to stay ahead. We’re making every effort to keep every advantage we worked so hard to build.”

Still, the slowdown in same-store sales in the U.S. has generated questions that Domino’s is losing market share to the growing number of restaurant chains using delivery services.

Doyle said that the chain hasn’t seen any impact from those delivery services. “What you’ve seen is more supply of delivery,” he said. “Some chains that did not offer delivery are now offering it. They’ve shifted a relatively small percentage [of their customers] from being carryout to delivery. If that’s how they’re sourcing their volume, it doesn’t affect our business.”

Doyle said that Domino’s would not consider outsourcing its delivery to third-party services such as Uber Eats, Grubhub or others. He cited the chain’s “competitive advantage” when it comes to delivering the food itself.

He also said the company is unlikely to use the services simply as aggregators, rather than delivery services. Doyle said that the largest aggregator charges restaurants a 15% fee—compared with the 25-cent fee Domino’s charges its franchisees for their orders. That fee would likely have to come down “dramatically” for Domino’s to list its offering on those aggregators’ sites and apps.

“We never say never, because the pricing may change dramatically,” Doyle said. “But it’s something we’re looking at.”

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