Domino's (DPZ 1.45%) has fared better than most fast-food businesses through the start of the COVID-19 pandemic. The pizza delivery giant just announced that sales increased in the fiscal first quarter, which includes a few weeks of social distancing across North America and Europe.
Since the start of April, meanwhile, growth has shot higher in the U.S. market, where consumers are still spending more time at home. But Domino's is also seeing intense pressure on its international segment, which is burdened by the temporary closure of nearly 2,000 locations.
Let's look at the latest operating trends.
Image source: Getty Images.
Volatile sales trends
As expected, sales were up modestly for the full period. Comparable-store sales rose 1.6% in the U.S. market and 1.5% in the international segment. The addition of 69 net new locations added to those gains to push global retail sales up 5.9% after excluding currency moves. That marked the company's 36th straight quarter of growth at home and its 105th consecutive uptick internationally.
The consumer landscape changed rapidly in the closing days of the quarter and into the start of the fiscal second quarter, though. In an interim update, Domino's said sales growth has shot higher by 7% in the U.S. market as gains in home delivery far offset the loss of on-premises sales at places like concerts and sporting events.
The international segment is looking weaker due to the temporary closure of 1,750 stores. That pressure, combined with a 3% demand drop at established locations, pushed sales down 13% in the segment over the three weeks ended April 12.
Financial updates
Domino's earns most of its profits from its U.S. franchisee network, and so a significant negative impact appears unlikely. Earnings in the first quarter were solid, with operating margin improving to 39% of sales from 38.6% a year ago. The pizza chain generates plenty of cash, including $78 million of free cash flow this quarter.
It counted $200 million of cash on the books as of late March and has since added to that by fully tapping its $159 million credit line. Total debt sits at just under $4.5 billion, mostly in long-term bonds. "I am pleased to report that Domino's is in a very strong financial position," CEO Ritch Allison said in a press release, "both at the brand and franchisee level."
Stepping into the unknown
Domino's sees several major variables likely to affect results over the next few quarters, including the pace of store reopenings and the path of the global economy. It's not clear how long the recent demand surge in the U.S. market will last, either. "We don't know how consumer behavior and restaurant purchasing patterns may evolve coming out of this crisis, Allison said.
Because of that uncertainty, executives withdrew their medium-term outlook that had called for modest growth in both the domestic and overseas markets through 2023. They had previously pulled their 2020 forecast, but the fluid economic situation has made it impossible to estimate basic factors like sales volumes even into 2021.
Thus, while investors can celebrate this chain's almost unique ability to grow its restaurant sales in the U.S. under lockdown conditions, they should brace for potentially weak global sales trends over the next few quarters.
