Domino's Delivered Again, but Not What Mr. Market Ordered

The pizza powerhouse failed the expectations game last quarter.

Motley Fool Staff
Motley Fool Staff
Feb 26, 2019 at 11:22AM
Consumer Goods

When Domino's (NYSE:DPZ) reported fourth-quarter results, the company didn't bake quite as big a pie as management told investors to expect. On same-store sales growth, revenue, and earnings, it missed its admittedly lofty targets.

In this segment from MarketFoolery, host Chris Hill and analyst Emily Flippen discuss the good and the bad of the chain, its international growth plans, its market saturation strategy, and more.

A full transcript follows the video.

Check out the latest Domino's earnings call transcript.

This video was recorded on Feb. 21, 2019.

Chris Hill: Let's start with the pizza, Domino's. I guess the fourth quarter was not what Wall Street was expecting because on the surface, this looks like a good quarter. You tell me, was there too much expected? Is Domino's Pizza, because it's performed so well for so long, is it now in that category where unless they absolutely crush it, then we're going to see days like today, where it's like, "Well, this was a good quarter, but we wanted perfect, therefore your stock's down 10%."

Emily Flippen: Well, management kind of shot themselves in the foot with this one. They projected same-store sales growth of 6%-8%. Came in a bit below that. Set some lofty revenue and earnings targets, missed on both of those lines. So it's not a surprise to see the negative reaction. But you're right. They still had same-store sales growth of 5.6%. I mean, gosh, they're selling pizza! It's impressive! They're continuing to open new stores, majorly in international locations. A lot of that growth in the future I think is going to need to come from their international sales, which have lagged behind U.S. sales. Believe it or not, the U.S. really likes our pizza. It's time for the international stores, foreign countries, to step up to the game here.

Hill: It's interesting, Patrick Doyle did such a great job running Domino's Pizza for the decade or so that he was the CEO. Off the top of my head, I can't name who the current CEO is. I'm wondering if what we're seeing today with the stock selling off is maybe a learning moment for them in terms of setting expectations. Among the number of ways that Patrick Doyle did a good job of running Domino's Pizza, one of them was managing expectations. You don't really get bonus points for setting lofty goals and saying them out loud to Wall Street analysts.

Flippen: [laughs] Well, the new CEO, whose name is also escaping me, his strategy is a concept he's calling "fortressing." I think you can probably guess at what it is -- building a lot of Domino's in central locations, essentially running out the competition by having the shortest, fastest delivery times. So, you might have three Domino's in your vicinity. They're making sure that you're getting your pizza ASAP. A lot of people were concerned moving into this strategy that, "Hey, you're going to cannibalize a lot of your pizza sales. I'm not sure how happy you franchisors are going to be when the new franchise opens up down the streets."

But they have some good examples of where it's working internationally. Did a great job expanding in India with this strategy. The question is whether or not it's going to continue to post the same impressive growth that we've seen historically, or if Domino's is really just playing themselves.

Hill: Among other things, I can just hear the gnashing of teeth of people on our editorial team, and probably at least a couple of our listeners who studied English, the whole turning a noun into a verb, fortressing. I'm not even really that gifted when it comes to the ways of the editorial dark arts, but that's one of those where I'm like, "Really? Fortressing? That's what we're calling this?'

Flippen: Well, they would hate me, then.