Domino's Pizza (DPZ -0.48%) reported fiscal 2022 second-quarter earnings on July 21. The figures showed that the international pizza company's profits fell from the same quarter in the prior year. It follows that investors were curious about what was eating into Domino's earnings.
The company thrived at the pandemic's onset when many governments restricted people from dining in person at restaurants. Sales and profits surged for Domino's as its delivery model was tailor-made to benefit from that kind of operating environment.
However, that benefit is fading due to the economic reopening that has consumers leaving their homes more often, doing things they missed out on during the earlier stages of the outbreak. So let's dive deeper into Domino's second-quarter figures and see what caused the drop in earnings.
Inflation is rising quickly
Domino's same-store sales (or "comps") fell internationally and domestically in its second quarter, which ended on June 19. The metric, which excludes the impact of new-store openings and closings, decreased by 2.2% internationally and 2.9% in the U.S. That's in stark contrast to the second quarter two years ago when comps surged by over 16% in both regions.
"We continued to navigate a difficult labor market, especially for delivery drivers, in addition to inflationary pressures combined with COVID and stimulus-fueled sales comps from the prior two years in the U.S.," said CEO Russell Weiner.
DPZ EPS diluted (TTM). Data by YCharts. TTM = trailing 12 months.
The combination of those factors led to Domino's reporting earnings per share (EPS) of $2.82 in the second quarter. That was down from the $3.12 it earned in the same quarter last year.
The pandemic started as a tailwind for Domino's business. With dining at competing restaurants restricted, it captured an increased share of consumers' budgets whenever they didn't feel like preparing food at home.
Now, with all dining options restored and consumers perhaps fatigued from eating so much pizza in 2020, they are choosing other places and foods.
To make matters worse, the reopening of competing businesses is making it harder for Domino's to secure the labor and the materials it needs to run the business. It has an acute driver shortage, causing some locations to reduce operating hours.
Plus, the market price for the goods used to make menu items rose by 15.2% year over year in the second quarter. The pandemic has adversely impacted the supply of goods and services. Understandably, fewer people are willing to work when a potentially deadly virus is still in circulation.
U.S. Consumer Price Index YOY. Data by YCharts. YOY = year over year.
More price increases to come
Domino's and its franchisees have increased menu prices to offset these forces. Overall, consumers were paying 6% more in the quarter for their average order. But as the decrease in EPS shows, it wasn't enough to entirely overcome rising costs. The company will likely have to put thought more price increases if it wants to protect profits in the near term. Until then, inflation will keep eating into the pizza chain's profits.
