Domino’s Pizza (DPZ) on Thursday said the coronavirus pandemic gives it a unique chance to tighten up its delivery network by adding more stores to U.S. towns and cities, as business closures free up real estate and lower rents. Domino’s stock fell.
The pizza delivery giant’s management made the remarks on Domino’s conference call to discuss its second-quarter earnings, which topped forecasts as customers ordered in amid a steady increase in U.S. coronavirus cases.
CEO Ritch Allison said the pandemic, if anything, made him “more enthusiastic” about the plan to add more stores — a strategy the company calls “fortressing.” Under that strategy, Domino’s redraws delivery jurisdictions and packs new stores closer to old ones. The strategy has helped speed delivery times.
“I also think that we are going to have, in the near and medium terms, fairly unprecedented opportunity in terms of the availability and the affordability of real estate out there,” he said.
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“An unfortunate reality of the pandemic is that there will be a number of retail stores and restaurants that will close, quite a few of which will be in a similar-footprint kind of environment to what we look for,” he continued.
The quarterly results and the plans come as the U.S. restaurant industry remains a patchwork of re-openings, re-closings and limited service, with the struggles of smaller restaurants potentially turning into gains for larger, deeper-pocketed chains that have built up their digital-ordering capacity.
“I think the reality is it has accelerated a lot of trends that were already in place in our industry,” Allison said of the pandemic’s effects on digital adoption.
He added: “Those things have leapt forward by a year or two or three years.”
Delivery Rivals To Remain Competitive
Still, Domino’s stock faces competition from online third-party deliverers. Those companies have brought smaller restaurants into the nation’s delivery ecosystem — although not without hefty fees for service — and tried to consolidate in recent weeks.
Uber (UBER), for instance, last week agreed to buy Postmates. Grubhub (GRUB) last month agreed to be bought by Just Eat Takeaway.com, a large food-delivery company based in Amsterdam.
Allison, on Thursday’s call, said the delivery tie-ups didn’t change the mechanics of that competition. He said he expected those delivery companies to continue flooding the market with discounts and other promotions. And he said consolidation would likely be the only way third-party deliverers achieve profitability.
Allison said he still had no interest in working with the delivery apps. He said he’d prefer Domino’s retain control over its technology and its contactless delivery service, and steer franchisees clear of the higher delivery fees.
Domino’s Earnings
Domino’s earned $2.99 per share during the quarter, well past estimates for $2.25. Revenue of $920 million topped expectations for $899.24 million.
U.S. same-store sales grew 16.1%, above forecasts for a 13.1% gain. International same-store sales of 1.3% came in just above estimates for a 1.2% increase.
The company saw a “significant” increase in new customer acquisition. The second quarter was the best in more than a year in terms of driving new active loyalty-program members.
As of July 8, there were fewer than 600 international stores temporarily closed, down from a peak of 2,400 closures in international markets.
Domino’s on Thursday also said a subsidiary had taken a $40 million minority stake in Dash Brands, a company that serves as the pizza chain’s master franchisee in China. It was unclear what percentage Domino’s controlled. The company said that if it wanted to be a strong brand, it had “to have China be a thriving market for us.”
Order Sizes, Night And Day
Domino’s, during its first-quarter earnings call in April, said that people had grown tired of cooking, leading to a bump in orders. Early sales results in the second quarter showed an increase in weekday orders and weaker results on the weekend and during evenings, as entertainment options remained scarce. Order sizes had increased, possibly due to more people eating together.
On Thursday, management said that order sizes were still up, as people planned more for leftovers. Sales growth at lunch and dinner had balanced back out. Evening sales remained weak, in the absence of sports and other entertainment.
Domino’s Stock
Shares fell 1.5% to 407.52 on the stock market today, after touching a high earlier.
The reversal put Domino’s stock back within buy range from a 387.95 buy point of a flat base. Rival Papa John’s (PZZA) lost 0.15%, and Pizza Hut parent Yum Brands (YUM) dipped 0.7%.
Domino’s stock has a strong 91 Composite Rating out of a best-possible 99. The EPS Rating of Domino’s stock, a gauge of earnings acceleration, is a best-possible 99. Domino’s relative strength line has been choppy since the spring.
Restaurants and bars have tried to reopen, after a months-long shutdown of sit-down dining. But some are reversing course as more people become infected with Covid-19 and states walk back their plans to restart their economies.
U.S. states earlier this year barred indoor dining at restaurants in an effort to muffle the coronavirus’s spread. Delivery and takeout were still allowed. But Wall Street analysts pegged Domino’s stock as a particularly big beneficiary, after the company invested heavily in its digital-order and delivery capacity.
Delivery Competition, Consolidation
Even as restaurants have tried to reopen, some data shows diners still felt cautious about entering one. A survey from a Bank of America restaurant analyst, published last month, found that less than half of respondents expected to feel “comfortable” going back to restaurants at some point before Labor Day.
The pandemic has suffocated the restaurant industry, which laid off scores of workers after mandated restrictions took hold. A separate Bank of America survey found that larger restaurants had rebounded more quickly than smaller restaurants.
Domino’s on Thursday said that across the entire pizza industry, from large chains to independents, fortunes would likely be determined by the strength of digital ordering infrastructure and delivery.
In April, Allison said it was too early to tell whether it was able to gain market share on independent restaurants, which might not have the same digital delivery infrastructure as a large chain, or the money to absorb the fees charged by the online deliverers.
“I think the last thing any of us in the industry want to see is a lot of independent restaurant closures,” he said on the company’s Q1 earnings call.
Source: Investors