Market News

Driver Shortage & Inflation Spoil Domino’s Q2 Earnings

Story Highlights

Domino’s needs to do more than just present promotional offers, to bring back its lost market share.

The world’s largest pizzeria, Domino’s Pizza (NYSE: DPZ), posted mixed second-quarter results, with earnings missing and revenue beating expectations. Shares swayed up 3.7% during the early trading hours yesterday and finally ended the day down 1.3% at $405.64.

The company’s earnings were hurt by a combination of labor shortages and an inflationary environment, which pressurized both the consumer’s discretionary income as well as the company’s margins.

Domino’s CEO, Russell Weiner, said, “Our results for the quarter faced challenges consistent to those I outlined back in April. 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.”

DPZ Q2 Results

Domino’s posted adjusted earnings of $2.82 per share, falling short of analyst estimates of $2.91 per share. The figure also came in much lower than Q2FY21 adjusted earnings of $3.12 per share.

On the bright side, however, total revenues of $1.06 billion grew 3.2% year-over-year and also beat the consensus estimates by $20 million. The solid revenue growth was attributed to a 7.2% boost in supply chain revenue.

Notably, global retail sales grew by 1.5% (excluding foreign currency impact) while U.S. same-store sales fell 2.9% and international same-store sales fell 2.2% (excluding foreign currency impact). The company ended the quarter with 233 net new store additions worldwide.

Meanwhile, Domino’s also announced a quarterly cash common dividend of $1.10 per share, payable on September 30, to shareholders on record as of September 15.

Domino’s Revises Fiscal 2022 Guidance

Domino’s revised its FY22 guidance to incorporate the impact of the currency price fluctuations and inflationary environment on input costs.

The company now expects negative impacts from foreign currency exchange rates on royalty revenues to be between $22 million and $26 million (up from $12 million to $16 million).

Similarly, food basket pricing is expected to increase by 13% to 15% compared to 2021, up from the 10% to 12% increase guided earlier.

The company maintained its general and administrative expense guidance of between $420 million and $428 million and capital expenditure guidance of $120 million.

Analysts’ Views on DPZ

Following the results, Stifel Nicolaus analyst Chris O`Cull reiterated a Hold rating on DPZ stock with a price target of $400, which implies 1.4% downside potential to current levels.

The analyst noted that Domino’s posted improved domestic same-store revenues compared to his and consensus estimates. But international same-store revenue fell more than expected. However, he believes that shares are fairly priced at current levels.

O`Cull believes that “Domino’s has a healthy brand with a strong price-value perception and compelling pipeline of innovation to continue delivering outsized transaction and SRS (same-store revenue) gains.” Plus, “DPZ’s growing scale allows it to have a more efficient supply chain, larger advertising war chest, and technology capabilities far superior to smaller chains. As a result, we argue DPZ is achieving decisive advantages over regional chains in several countries.”

Similarly, BTIG analyst Peter Saleh maintains a Hold rating on DPZ stock due to the driver shortage issue, despite the improvement in sales, store operations, and segment margins. The analyst awaits more clarity on the issue from management before he can assume a more optimistic stance.

Overall, the Street is cautiously optimistic about DPZ stock with a Moderate Buy consensus rating based on seven Buys, 13 Holds, and one Sell. The average Domino’s Pizza price target of $409.42 implies that shares are almost fully valued at the current levels. Meanwhile, the stock has lost 26.2% year to date.

Parting Thoughts

Domino’s is struggling with the driver shortage, which is impacting its delivery business. Additionally, inflation raising input costs of materials and hampering margins. Although the pizzeria is undertaking promotional events to help boost its sales, the current macroeconomic headwinds will continue to play spoilsport until the economy shows signs of stabilizing.

Nonetheless, the CEO remains optimistic. He said, “The strength of our franchisees and team members, along with the strategies we are putting into place, make me confident we are on a path to overcome these short-term obstacles and make the Domino’s brand and business stronger than ever.”


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