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Here's 1 Reason Why Domino's Stock Is Cooling Off

By Parkev Tatevosian, CFA – Updated Oct 8, 2021 at 9:29AM

Key Points

  • Rising wages and labor shortages are making investors pause on Domino's stock.
  • Domino's franchise model will help it deal with the challenge better, but rising wages are still bad news for the bottom line.
  • Domino's will report earnings on Oct. 14.

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The stock had been on fire until the recent hiccups.

For the most part, Domino's Pizza (DPZ -0.04%) stock has been on fire recently. The stock is up 25% in 2021. It's also up 91% in the last two years and 214% over the previous five years. However, it has cooled off recently and is down 8% in the last month.

Two reasons for the slowdown could be the widely reported shortages of supplies and labor in global economies. Domino's relies heavily on delivery drivers to fulfill orders, and the market could be worried that the company will have difficulty hiring and retaining enough staff. Let's take a closer look. 

People taking slices of cheese pizza out of a pizza box.

Domino's stock is down 7.8% in the last month. Image source: Getty Images.

Labor shortages will hurt Domino's one way or another

Management acknowledged that wages are going up broadly across the regions it operates in. Additionally, the company highlighted it has options on how to offset those increases. Here's how CEO Ritch Allison explained the issue in July's second-quarter earnings call:

When we think about how do we offset those wage increases and still deliver a terrific four-wall economic model, pricing is certainly one of the levers that is out there. And at the local level, we do this in our corporate stores and our franchisees have the latitude to do this for their businesses. We have taken some increases in our single, transparent delivery fee.

Wherever we are, we charge a single fee. It varies significantly market to market based on the local dynamics, but that's certainly a lever that we and our franchisees have pulled. And then, menu pricing. Our franchisees have control of that and in the higher-wage markets, you will find generally higher menu prices at Domino's.

This could be a scenario where Domino's decentralized franchise model will work in its favor. The vast majority of its locations are run by franchisees who can monitor the local labor pool more effectively. If they find a specific wage is not attracting adequate staff, they can increase it to get people on board. They also have the freedom to adjust menu pricing and delivery fees. So rather than Domino's management deciding wages and menu prices and then implementing those prices throughout its numerous regions, it leaves those things up to local entrepreneur franchisees to determine what works best. 

The downside to that is decisions made by those franchisees can hurt Domino's brand. For instance, if they are unwilling to hire staff at higher wages and service times start to deteriorate, it will not reflect well on Domino's. 

The market is hitting a pause on Domino's stock

Overall, rising wages are bad news for Domino's bottom line. Even though its franchise business model will help it deal with the scenario more effectively than others, sales are likely to decrease if franchisees raise prices to offset wage increases. If they choose to operate short-staffed instead, service times will worsen and customers could choose to go elsewhere. Finally, if they decide to pay for more staff, and absorb the higher costs rather than passing them along to consumers, profit margins could decrease. 

Those are a couple of reasons why Domino's stock has been cooling off lately. Investors prefer to wait and see if the shortage of labor and increasing wages will persist or reverse after more of the population gets vaccinated against COVID-19, and the risk of infection has significantly decreased. The company will report earnings results on Oct. 14 and investors will get more insight into staffing shortages. It would be prudent to wait for that info before deciding on Domino's stock.  

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool recommends Domino's Pizza. The Motley Fool has a disclosure policy.

Stocks Mentioned

Domino's Pizza Stock Quote
Domino's Pizza
DPZ
$369.20 (-0.04%) $0.16

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