Domino's Pizza (DPZ 1.09%) is scheduled to report fiscal second-quarter 2022 earnings on July 21. The international pizza company is grappling with rising inflation and labor shortages, as the economic reopening is taking the wind out of its sails.
Domino's thrived in the early stages of the pandemic, when most governments prohibited dining at restaurants. Now that business restrictions have eased and folks have more choices on what to eat, Domino's sales growth is decelerating.
Domino's is asking franchisees to pay more
In its most recent quarter, which ended on March 27, Domino's overall revenue increased by 2.8%. Note that Domino's runs on a franchise model, where most of its restaurants are run by franchisees. Domino's earns revenue by taking a percentage of sales as a royalty. Additionally, Domino's earns revenue by selling franchisees the raw materials they need to make pizza, breadsticks, and chicken wings. Interestingly, Domino's increased the prices on those goods sold to franchisees by 11.9% in the quarter that ended in March.
The coronavirus pandemic has snarled supply chains worldwide. As production has become constrained, the prices of goods and services have soared. Domino's has not been immune to the impacts of inflation. The company attempts to pass on those higher costs to franchisees with the aforementioned price hikes. Still, those increases were not enough to stem the tide of rising costs, and Domino's net income fell by 22.8% in its most recent quarter. That could mean that the company has more price increases in store.
This comes just as consumers have more choices on where to eat when they choose not to cook at home. Of course, franchisees have not absorbed these higher costs without executing their own price increases. These are the costs that consumers face. The combination of more choices on where to eat and higher pricing lowered spending at Domino's in the U.S. Same-store sales, which measures sales at stores open for at least the previous 12 months, fell by 3.6% in the quarter ended in March.
Domino's and its franchisees are caught between a rock and a hard place. If they don't raise prices to counter inflation, profits will fall. If they raise prices too much, customers will flee to competitors or choose to prepare a meal at home instead.
What this could mean for Domino's investors
Analysts on Wall Street expect Domino's to report revenue of $1.05 billion and earnings per share (EPS) of $2.88. If the company meets those projections, those figures will represent an increase of 7.9% and a decrease of 7.7%, respectively, from the same period the year before.
Based the Wall Street estimates, it appears analysts believe that Domino's and its franchisees have chosen to limit the price increases. The company aims to protect sales and take a hit on profits in the short term as it battles inflationary headwinds. Investors seem happy with the choice, as the stock has been up over 7% in the last month. Still, shareholders will want to monitor this dynamic at Domino's with a close eye when it reports earnings on July 21.