Domino’s same-store sales slow further

The pizza chain recorded its lowest rate of growth in seven years amid intense competition from third-party delivery.
Photograph courtesy of Domino's Pizza

Domino’s Pizza recorded its lowest U.S. same-store sales figure in seven years in the third quarter as the Ann Arbor, Mich.-based pizza chain continues to feel the heat from growing third-party delivery players.

The company said Tuesday that its same-store sales rose 2.4% in the U.S. in the third quarter ended Sept. 8. That is the lowest rate of growth for the pizza chain since the second quarter of 2012.

But it was Domino’s 34th-straight quarter of growth, a remarkably long string that has turned the company into the largest pizza chain in the world.

International same-store sales growth also slowed, rising 1.7%, the 103rd-straight quarter of same-store sales growth.

“It is an evolving competitive and operating environment” in the U.S., CEO Ritch Allison said on the company’s third-quarter earnings call on Tuesday. “But we continue to feel our fundamentals are solid and our priorities in the business remain in the right place.”

To defend its turf, the company in September started advertising “delivery insurance” to guarantee that a pizza will arrive quickly and in-tact. It has also started offering discounts for late-night orders when many restaurants are getting third-party delivery sales.

The slowing growth has worried Wall Street, which has sent Domino’s stock down 13% over the past year. The company’s stock was down as much as 6% in early trading on Tuesday but later turned positive.

The company’s lowered outlook is unlikely to ease those concerns. The company lowered its guidance for sales growth over the next two to three years, suggesting that global sales growth will increase 7% to 10%, down from the 8% to 12% it previously expected. It also said same-store sales would rise 2% to 5% over the coming years, down from 3% to 6%.

Domino’s has been building stores more aggressively in its domestic market as part of a “fortressing” strategy, believing that it can improve delivery times and increase carryout sales, albeit at the expense of some same-store sales growth.

But executives this year have also acknowledged that third-party delivery services have played a role in the softening results of late.

That did not change in the third quarter. And executives said on Tuesday that “uncertainty” regarding that level of competition led it to change its growth outlook.

“There is just a level of uncertainty in the near-term around some of the competing delivery offers in the marketplace,” Allison said. He also said that the company’s fortressing strategy will continue to put pressure on same-store sales in the coming years.

Domino’s said on Tuesday that its same-store sales last quarter entirely from ticket growth, and that it was weakest in its delivery business, a sign that third-party delivery and fortressing are eating into sales.

Carryout sales, however, continue to grow “at an impressive rate.” Carryout now represents 45% of the company’s sales, and Allison noted that the carryout segment overall is “significantly larger than the delivery segment.”

The company opened 40 new stores in the U.S. and 174 internationally in the third quarter. The company now operates nearly 6,000 U.S. stores and 16,528 worldwide.

Revenues for the company increased 4.4% in the quarter to $820.8 million. Net income rose 2.7% to $86.4 million, or $2.05 per share.

UPDATE: This story has been updated with comments and details from Domino's earnings call Tuesday.

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