Investors have lost their appetite for Domino's (NYSE:DPZ) stock in 2019. The fast-food giant had been winning market share for over a decade and riding a wave of consumer demand for digital ordering and home delivery. Yet its growth pace slowed in recent quarters, suggesting an approaching end to that streak of market-thumping sales gains.
On Tuesday, the pizza delivery leader again posted decelerating revenue gains at its existing locations, and management confirmed that this weaker growth posture will represent the new normal for at least the next few years.
More on that long-term outlook in a moment. First, let's dive right into the latest results.
Growth slows again
Sales rose 8% after accounting for currency exchange rate shifts, thanks to the combination of a growing global store base and higher sales at existing locations in both the U.S. and internationally. Yet looking deeper into that growth metric shows some important areas of concern.
Comparable-store sales gains in the core U.S. market landed at 2.4% compared to 3% last quarter. Comps have now slowed in each of the last six quarters after reaching a high of 8% in early 2018. There's little ambiguity about what's driving the decline, either. CEO Richard Allison told investors he's seeking spiking delivery competition from fast-food giants and from third-party aggregators, and that pressure seems to have only intensified over the last few months.
Domino's international division didn't fare any better, with comps falling to 1.7% compared to 3.5% in the 2018 fiscal year. The chain has seen over 100 consecutive quarters of comps expansion in this segment, but that streak appears to be at risk right now.
A few key wins
On the bright side, Domino's finances are as strong as ever. The company found room to open another 43 stores in the mature U.S. market as part of its "fortressing" strategy. Its efficient operations kept costs low enough that it only needed to close three out of over 5,600 locations, too.
Those franchises produced plenty of cash and robust earnings, too. Operating margin improved to 38.5% of sales from 37.6% a year ago. Pre-tax profits were $110 million, or 13.4% of sales, compared to $99 million, or 12.6% of sales last year. "It was a good quarter for Domino's," Allison said in a press release, "as we continue to lean on our fundamental strength against a unique competitive environment."
That tough environment has changed management's view on the global delivery industry, which is becoming a major battleground in fast food. To that end, Domino's now sees U.S. comps rising by between 2% and 5% annually over the next two to three years. That core metric was 7% in 2018, 8% in 2017, and over 10% in 2016.
The international segment is expected to see a similar deceleration, with comps of between 1% and 4% compared to a recent high of 6% in 2016. Domino's still expects to grow its store base by about 7% each year.
Put it all together, and Domino's is now predicting overall sales gains of between 7% and 10% compared to its prior outlook of 8% to 12%. That rate might still translate into market share gains and would likely generate some of the strongest profit growth in the industry, yet it's far from the returns that investors were used to seeing as recently as 2018.