Domino's Pizza (DPZ -0.48%) is scheduled to report first-quarter 2022 earnings on April 28. The iconic pizza company thrived when restaurants were forced to close for in-person dining at the pandemic's onset. With billions of people at home and restaurants closed, sales boomed for Domino's.
Two years later, the pandemic is evolving into a headwind for the business. Other restaurants have reopened, and the competition for labor and commodities needed to keep the restaurants running is raising operating expenses.
Investors interested in Domino's should keep an eye on how big of a bite inflation takes out of Domino's sales and profits when it announces Q1 results on Thursday.
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Higher prices could decrease consumer demand for Domino's Pizza
Domino's revenue jumped by 13.8% in 2020, but that wasn't the first time sales have grown by double-digit percentages in a year for the pizza giant. The company had achieved that feat five other times in the decade before the pandemic. In 2021, revenue growth decelerated to 5.8%. Domino's operates on a franchise model. So it generates revenue as a percentage of sales that franchisees generate.
DPZ Revenue (Annual YoY Growth) data by YCharts
Some decisions, like national promotions, are still centralized. For instance, the corporation has decided to sustain its $5.99 each deal for two medium pizzas despite rising inflation. However, the deal will move to carryout only. Folks who order for delivery will pay $6.99 each. The business faces more pressure in finding drivers, so the higher price for delivery counters the challenge. Franchisees have to pay higher wages to attract drivers, and the added costs are eating into their profits.
Still, franchisees can set their own delivery fees, so they could theoretically boost the cost high enough to offset the centralized discounted offer. The higher prices will then work to decrease sales. The franchisees will have better profit margins, but Domino's will capture lower revenue because sales could decline. For that reason, if inflation persists, it could hurt revenue for Domino's this quarter and beyond.
What this could mean for Domino's Pizza investors
Analysts on Wall Street expect Domino's Pizza to report revenue of $1.03 billion and earnings per share (EPS) of $3.06. If the company meets those projections, it will represent increases of 4.6% and 20%, respectively, from the same period the year before.
DPZ data by YCharts
Rising inflation, the competition for labor, and slowing sales have investors concerned about Domino's stock in 2022. Down 33% on the year, it has arguably already paid the price for the headwinds. Over the medium term, the company remains confident it can grow retail sales by 6% to 10% and store growth by 6% to 8%. And in the last decade, it has increased operating income from $280 million to $780 million.
If inflation hurts the company more than expected in Q1 and the stock falls in response, that could be an excellent opportunity for long-term investors to scoop up Domino's stock at a discount.
