Domino's (DPZ 0.47%) investors could be in for a rough week ahead. The pizza delivery giant reports its second-quarter earnings results on the morning of Thursday, July 21, and Wall Street is worried about bad news in that announcement.
The chain is facing soaring costs, along with challenges in keeping its restaurants fully staffed. And while the fast-food industry is growing, competition is heating up as more restaurants attack the home delivery space.
With that backdrop in mind, let's look at the key metrics to watch in Domino's upcoming earnings report.
Sales will rise
Domino's last earnings report contained many signs of stress on the business. Inflation, labor shortages, competition, and soaring results from a year earlier all contributed to the chain posting declining sales in the U.S. market for only the second time in over a decade.
The year-over-year comparisons are getting easier now because the biggest impact from financial stimulus payments occurred in early 2021. Still, investors are looking for Domino's to post just a modest global sales increase as revenue rises about 8% to $1 billion.
Looking deeper into that figure, watch the U.S. market for signs of a return to stable sales growth. The main factor pushing the stock lower lately has been the worry that Domino's has lost some of its dominant market share position as the go-to fast-food delivery option. It attempted to reclaim that crown with help from pizza promotions like its half-off deal in June. Thursday's report will show whether those initiatives worked.
Handling costs
Domino's likely saw soaring costs on its food inputs, transportation, and labor. But the good news is that this business is well equipped to handle spikes like these. Domino's locations are famously efficient, as they use a small footprint to process large volumes of take-out and delivery orders. The company provides its franchisees with most of their ingredients, too, which gives it flexibility around cost increases.
DPZ Free Cash Flow data by YCharts.
Yet investors will still be watching gross profit margin and operating profit margin for signs that Domino's remains in a strong financial position. Watch free cash flow for more context here as this metric helps show the returns generated by franchisees. Annual free cash flow trends took a big step lower last quarter after passing $600 million in late 2022.
Looking ahead
Domino's doesn't issue short-term earnings forecasts, but management will discuss any changes to the competitive landscape that might pressure results in late 2022 and into 2023. Executives have been bullish about their long-term outlook, in part because the chain is so well positioned in the fast-food space. Domino's is the share leader in pizza delivery in the U.S., accounting for over 30% of the market in 2021. It has a big carryout opportunity, too, as it laid claim to just 16% of that niche last year.
Fiscal 2022 is shaping up to be a tougher year, though, mainly because Domino's is seeing elevated competition from many more restaurants and fast-food chains. For example, Starbucks recently noted that it is shifting its model to accommodate higher take-out and delivery demand.
The key question heading into Thursday's report is whether moves like that are eroding Domino's dominant position, which has delivered market-thumping investor returns for more than a decade.
