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Domino's Marks the End of an Epic Streak in the Fast-Food Industry

By Demitri Kalogeropoulos – Oct 15, 2021 at 6:37AM

Key Points

  • Revenue took a rare step back in the U.S. after surging a year ago.
  • Margins are still rising, implying modest cost pressures.
  • The flood of competition in the home delivery space might be stalling Domino's momentum.

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Sales are down in the U.S., but the long-term growth outlook is still bright.

It was bound to happen eventually. Domino's (DPZ 0.97%) this past week announced that third-quarter sales dropped in the core U.S. market, ending one of the most impressive growth streaks in the fast-food world.

The pizza delivery leader is still growing in outside markets and is aggressively expanding its store base, even in the mature U.S. segment. But competition, plus a return to more normal eating out habits, is taking its toll on the business.

Let's dive right in.

A family eating pizza at home.

Image source: Getty Images.

Sales trends

Sales rose 3% to $1 billion, which was weaker than the 9% boost that most investors were expecting. The shortfall came from the U.S. business, which dipped 2% to mark the first decline in over 40 consecutive quarters.

CEO Richard Allison pointed out in a press release that revenue is still up significantly compared to 2019. "We were pleased with our results this quarter ... while rolling over our highest quarter of 2020," he said.

Still, sales gains have slowed in recent months. Comparable-store sales in the U.S. were up 16% on a two-year basis this quarter compared to the prior quarter's 20% increase.

The news was better internationally, where Domino's extended its growth streak to 111 consecutive quarters. The chain is also facing no challenge in expanding its store base.

It added 323 new locations in the period, including 45 in the mature U.S. market. Domino's closed just one store out of its base of over 6,000 in the U.S. this quarter in a testament to the efficiency of its small-footprint locations.

Earnings wins

There wasn't any evidence of rising costs hurting profits. On the contrary, Domino's notched higher operating margin as royalty fees offset increased food costs. The company didn't need to advertise heavily or offer many promotions in this high-demand environment.

The efficiency gains trickled down to the bottom line, where net income landed at $120 million, or 12% of sales, compared to $99 million, or 10% of sales, a year earlier.

Cash flow trends are strong, too, which enabled Domino's to spend more on direct returns, including dividends and stock repurchases. Total debt held steady at $5 billion.

The outlook

The slight sales decline in the U.S. market doesn't threaten Domino's wider growth ambitions. Management still sees room for as many as 8,000 locations there, equating to a 24% increase from today's footprint. Sales should grow in the low single-digit range at home while rising between 3% to 6% internationally, according to the chain's long-term forecast.

That's a formula for impressive investor returns over time because it implies steady market share gains in the competitive fast-food niche. Sure, it was jarring for investors to see sales gains slowing to 15% on a two-year basis. But Domino's is likely to return to its steady growth path once the disruptive demand swings settle down from the pandemic and its aftermath.

And its stores remain fantastically profitable, meaning the company has flexibility as more fast-food chains push into the home delivery niche.

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

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