Domino's Pizza (NYSE: DPZ), the largest pizza retailer globally, will report fiscal third-quarter earnings on Thursday, Oct. 14. The company is sustaining the momentum it gained at the pandemic onset when folks were not allowed to dine inside at restaurants. That fueled a surge in orders for Domino's, and it demonstrated the power of its robust digital ordering and delivery network.
When the company reports third-quarter earnings, it will be fascinating to watch how it deals with the confluence of potentially game-changing factors as economies reopen.
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Supply shortages are slowing store growth
In its fiscal second quarter, Domino's reported global retail sales growth of 17.1% from the year prior. However, the increase was more prominent internationally (29.5%) than domestically (7.4%). The primary cause of the difference is the stages of economic reopening in various countries.
One challenge as businesses reopen is a shortage of supplies and labor. Fewer people are willing to work when a deadly virus is in circulation, and the prevailing wages are roughly the same. Here's what CEO Ritch Allison had to say on the matter in its Q2 conference call:
We continue to operate in a very difficult staffing environment for our stores and our supply chain centers. The combination of COVID, strong sales, the accelerating economic growth across the country and the ongoing government stimulus continue to result in one of the most difficult staffing environments that we've seen in a long time. And frankly, this led to higher margins in our corporate store business than we would like to see.
The reality is that we were operating during the quarter with fewer team members than we would like to have in many of our stores. This puts pressure on our operators to meet demand, while continuing to deliver great service. In the back half of the year, we expect to implement additional wage increases across certain corporate store markets and positions.
It will be imperative to watch how much the company will have to increase wages to entice workers. There is also the risk it will not be able to hire enough workers even after increasing wages. The world is coming up on the holiday shopping season, where businesses are scrambling to ensure they have enough products and staff to fulfill the seasonal increase in demand.
The pressure appears more acute in the U.S., as its international franchisees added 203 new stores in Q2 versus 35 in the U.S. This faster store growth internationally could partly result from higher saturation in the U.S. and more opportunities elsewhere. Still, the labor and supply shortages are a factor, no doubt. Management sounded optimistic that the constraints slowing new store growth would ease in the second half of the year.
Domino's stock is on fire
Analysts on Wall Street expect Domino's to report revenue of $1.03 billion and earnings per share of $3.11 in Q3. If Domino's meets those expectations, it would amount to increases of 8.4% and 24.9%, respectively, from the same period of last year.
Domino's stock is trading at a price-to-earnings ratio of 38, near the highest level in the last decade. Furthermore, the stock is already up 25% year to date. Therefore, if the company reports earnings per share below estimates, the stock could fall. That scenario may be a buying opportunity for long-term investors, depending on the size of the miss and the business reasons behind it. Be sure to place Domino's on your watch lists and keep an eye on its earnings report.
