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Domino’s stock falls on slowing same-store sales

But the company opened its most stores in 20 years last year as operators shift to unit growth.
Photograph courtesy of Domino's Pizza

Domino’s Pizza stock fell nearly 9% on Thursday after the company reported weaker-than-expected same-store sales late last year, leading investors to worry that the chain’s incredible run of market share growth is slowing down.

The company said that its same-store sales rose 5.6% in the quarter ended Dec. 31. That was a slowdown from the 6.3% growth the chain reported in the previous quarter.

On a two-year, “stacked” basis, same-store sales slowed even further—9.8% in the fourth quarter, compared with 14.7% in the third quarter.

That highlights the high expectations investors have for the Ann Arbor, Mich.-based pizza giant. The chain has not had a decrease in the key metric since the first quarter of 2011, and in many of those quarters, the chain’s performance was in the double digits.

The company has used that performance to become the country’s largest pizza concept.

Executives on Thursday said they were “pleased” with the chain’s performance in the fourth quarter because the same-store sales came from an increase in order count. The company has been focused on getting more customers in the door, saying that order volume improves total profitability.

“We were very pleased with the comp in the fourth quarter for a couple of reasons,” CEO Ritch Allison said on an earnings call Thursday. “One is that it was driven by a very healthy dose of order count growth and secondly, really nicely within the range of our long-term expectations.”

But they also noted that the company is adding locations at the highest rate in decades.

Domino’s opened 258 new U.S. locations in 2018, the largest number of locations the pizza chain has opened in 20 years.

“The way I look at it is that the business did not decelerate from ’17 to ’18,” Allison said. He noted that retail sales, which account for both same-store sales and unit count growth, accelerated both for the full year and in the fourth quarter.

U.S. retail sales increased 10.2% in the fourth quarter, for instance, compared to 7.6% in the fourth quarter of last year. For the full year, retail sales grew 11.2%, up from 11.1% in 2017.

Domino’s operates nearly 16,000 locations worldwide, including nearly 5,900 in the U.S.

Investors have been bracing for a slowdown in Domino’s U.S. business. The company’s sales performance has taken its stock from the mid-single-digits a decade ago to more than $300 a share at one point this year.

But including the drop Thursday, the company’s stock has lost nearly 17% of its value over the past month.

Domino’s is focusing more on driving unit count growth in the coming years as the chain looks to solidify its market share. Company executives told investors last month that the chain’s failure to grow unit count for much of the past 20 years probably invited competitors to enter the market.

Domino’s plans to grow 2,000 U.S. locations to increase carryout orders and improve delivery speed, which the company believes will keep itself more competitive not just with other pizza chains but with the growing, overall delivery business.

Allison added that this “fortressing” strategy will help with labor costs—which continues to increase, and pressure margins, both at company operated locations and franchisee restaurants.

By building more locations, the company can reduce delivery times and, therefore, the costs for delivery.

“The real game-changer over time on labor is going to have to come from our efforts to fortress our market,” Allison said. “The most expensive thing that we do is take pizza from Point A to Point B. And as we look to reduce the radius of these delivery areas, in addition to driving incremental sales per household, we are also looking to reduce the cost of delivery. It just makes sense.”

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