Recent events have left Domino's Pizza (NYSE:DPZ) struggling to deliver its pizzas to its customers. While the company has implemented short-term measures to try to solve its biggest problem, here's why investors should be concerned that the world's largest pizza chain won't be able to turn around its struggling stock anytime soon.
Driver shortages and surging gas prices don't mix
Let's face it: Americans love their pizza, particularly when it's delivered. No company knows that better than Domino's: Delivery makes up two-thirds of its sales. However, the company can't find enough delivery drivers and that was before gas prices recently spiked to historic highs. Management blamed a tight labor market, rising wages, and the Omicron variant on its recent earnings call for the driver shortage. Worse yet, management stated driver staffing "may remain a significant challenge in the near term" and admitted it's impeding its "franchisees' ability to take and service all of the orders coming into our stores" on its most recent earnings call.
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Domino's delivery driver shortage contributed to its total fourth-quarter revenue falling 1% year over year. from $1.35 billion in 2020 to $1.34 billion in 2021. Management noted that its fiscal year 2020 contained a 53rd week, so revenues would have risen 6% year over year when factoring in the extra week. Still, the lackluster revenue growth looks even more mediocre knowing the company increased its prices by about 3% year over year. For comparison, its smaller competitor Papa Johns (NASDAQ:PZZA) increased its revenue by more than 12%, from $469.8 million to $528.9 million, during the same time period.
Domino's aims to ease its driver shortages by incentivizing customers to choose carryout over delivery. The "carryout tips" promotion gives carryout customers who order online $3 toward their next order. Notably, the deal runs through May 22, perhaps signaling that the company expects its delivery driver problem to continue until at least then.
The company won't turn to third-party delivery apps like DoorDash to UberEats to solve its biggest headache because management vehemently opposes them. In fact, the company ran a "Surprise Frees" ad campaign in 2021 that gave away $50 million in free food to its online-ordering customers as a way of highlighting the annoyance of surprise fees from third-party delivery apps.
Why Domino's delivery driver shortage might not matter
More than any other pizza chain, Domino's focuses on its digital ordering channels and loyalty rewards. In 2021, 75% of U.S. retail sales occurred via its digital channel, and its loyalty program "Piece of the Pie" had 29 million active users, and 70 million customers enrolled. Management believes that its previous digital investments create an opportunity to drive customers toward carryout. Beyond the aforementioned carryout tips program, the company plans on experimenting with lower prices of popular menu items when the customer chooses carryout over delivery.
Whether or not those new initiatives will drastically change consumer habits is yet to be seen, but Domino's previously found success with its "Domino's Carside Delivery" program, which started during the height of the pandemic as a contactless carryout option. It later evolved to delivery to your car within two minutes of ordering online, and contributed to Q4 2021's 10% year-over-year growth in carryout same-store sales, according to management.
Can Domino's stock deliver again?
Domino's stock is down about 30% from its 52-week high in late Dec. 2021. The pizza chain's facing unprecedented challenges to its delivery services as the labor market tightens and gas prices reach historic highs. Meanwhile, the company is in the midst of transitioning leaders; current CEO Ritch Allison will retire on April 30. Until Domino's can stabilize its delivery drivers or significantly change customer behavior from delivery to carry out orders, expect its stock to stay cold and soggy.
