For almost all of the last decade, investors could count on Domino's (DPZ -0.08%) to increase its sales with each passing quarter. The pizza giant's dominant position in home delivery, and its ability to quickly fulfill a wide range of fast-food orders, helped it boost revenue through almost every flavor of selling environments.
Except the most recent one.
Domino's this week announced that comparable-store sales fell in its core U.S. market for only the second time since early 2011. That slump doesn't mean the investing thesis is broken for the stock. And the chain has a long expansion runway ahead even after opening its 19,000th global location. But earnings trends might still worsen before they get better.
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Sales fell 4%
Domino's reported a 3.6% sales decline in the U.S. through late March, which was the main factor pulling revenue slightly below expectations for Q1. It marked only the second time the chain posted declines there since mid-2011 (the other occurrence was in Q3 of 2021).
There were good reasons for the pizza giant to see reduced sales in the period, including the fact that revenue soared a year earlier, back when financial stimulus measures were boosting consumer spending and pandemic lockdowns were more widespread.
Domino's also endured a tougher operating environment, impacted by competition, inflation, and labor shortages. "We faced a number of headwinds during the first quarter," CEO Ritch Allison said in a press release.
The good news
There were bright spots in the report, of course. Domino's grew its global store base by over 200 locations in Q1, with gains occurring both in mature markets like the U.S. and in places like Brazil and India.
The company's earnings were cushioned by its efficient business and its franchise selling approach. Domino's booked solid profits through early 2022. However, the financial stress is clear. Operating profit margin fell to 16.3% of sales from 19% a year ago. Net income declined to $90 million or 9% of sales, from $118 million or 12% of sales, in early 2021.
Targeting more growth
Without issuing a detailed outlook, management warned that it expects many of these earnings pressures to continue deeper into 2022. Domino's is going through a leadership transition, too, as Russell Weiner is set to take over the CEO spot in early May.
The big question is whether Domino's is losing its grip on the delivery and takeout market as rival restaurant chains pour resources into the segment. The company has fended off many similar competitive threats in the past decade through a combination of aggressive pricing, popular menu innovations, tech leadership, and unbeatable convenience. Few companies can deliver such a wide range of fast-food products to most U.S. consumers so quickly, after all.
But the aftermath of the pandemic has made it hard to judge whether Domino's is losing that competitive edge, or just going through a temporary growth hangover. We'll get clarity on that topic over the next few quarters. In the meantime, shareholders can expect more volatility in the stock price ahead.
