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Pie in the Face for Domino's

By Rick Munarriz – Updated Apr 5, 2017 at 5:24PM

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The pizza delivery specialist lacks toppings in its latest quarter.

Nearly everyone has experienced that appetite-deflating moment when they crack open a delivered pizza box to find that they've got the wrong pie. Calling the pizzeria may prove therapeutic, but you're hungry, and getting the right one will take time.

You ultimately settle. You flick off the mushrooms and banana peppers. You rifle through the fridge for cold cuts that can pass for pepperoni. You make the most out of a bad situation, but it's rarely a good meal.

Well, this morning it was time for Domino's Pizza (NYSE:DPZ) shareholders to crack open a bad box. Shares of the pizza delivery chain were off by as much as 13% after the company posted disappointing third-quarter results.

Earnings fell by 55% despite a 3% top-line uptick. Chunkier debt payments, higher food costs, and a dip in domestic comps helped eat away at the company's performance. A profit of $0.17 per share is well below the $0.23 a share that analysts were expecting.

What did the pros miss? The company's recapitalization strategy leaves it saddled with large interest expense payments. There is nothing wrong with taking on a little debt, but it stings badly if you're not at the top of your game.

Domino's can brag about its impressive streak of posting positive international comps in each of the past 55 quarters, but clearly, there are problems at home.

It's not only Domino's. Papa John's (NASDAQ:PZZA) and Pizza Inn (NASDAQ:PZZI) are trading well off their all-time highs. Pizza Hut parent Yum! Brands (NYSE:YUM) is tickling new highs, but that is also the result of success at its KFC and Taco Bell fast-food joints.

What's going on? Can it be something as simple as Subway putting its speedy Turbochef (NASDAQ:OVEN) convection ovens to good use by adding pizzas in some markets? Is it part of a larger trend against pizza consumption?

Don't bank on that last point. Middleby (NASDAQ:MIDD) -- the provider of Papa John's pizza ovens -- is doing just fine these days. Besides, food costs may be an industrywide matter, but Domino's peers didn't follow the pizza giant into a costly recapitalization plan.

You're on your own with that pie, Domino's. My condolences to the shareholders, though. I know the feeling. The pie isn't as meaty as you expected, and all you've got are some slabs of Oscar Meyer in the frige. You wanted the substance, the zing, of pepperoni -- and you have to settle for bologna. 

Hungry for more?

  • In May, results were as flat as a panned pizza.
  • Domino's topped off its pizza with a special dividend.
  • Last quarter, the company delivered the right order.

Middleby is a Hidden Gems stock pick. If you want more than just bologna in your portfolio, check out Tom Gardner's stock-picking service with a free, 30-day trial.

Longtime Fool contributor Rick Munarriz enjoys pizza from the major chains, but also from many of the mom-and-pop pizzerias around town. He does not own shares in any company mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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Stocks Mentioned

Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
DPZ
$330.00 (3.08%) $9.86
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$110.65 (-0.13%) $0.14
Papa John's International, Inc. Stock Quote
Papa John's International, Inc.
PZZA
$75.15 (1.39%) $1.03
The Middleby Corporation Stock Quote
The Middleby Corporation
MIDD
$126.85 (-1.02%) $-1.31
RAVE Restaurant Group, Inc. Stock Quote
RAVE Restaurant Group, Inc.
RAVE
$1.30 (12.07%) $0.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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