Domino’s Pizza says 3-to-5-year outlook is irrelevant due to new competitors and deep discounts
Domino’s Pizza Inc. says it’s going to shorten its long-range outlook on some business metrics to two-to-three years from three-to-five years because the new restaurant landscape makes the view further out less significant.
Previously, Domino’s DPZ, +4.65% forecast global retail sales growth of 8% to 12% over the next three-to-five years, U.S. same-store sales growth was expected to be 3% to 6% and international same-store sales growth of 3% to 6%.
Now the pizza delivery company is forecasting 7% to 10% global retail sales growth over the next two-to-three years with U.S. same-store sales growth of 2% to 5% and international same-store sales growth of 1% to 4%.
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“[W]e believe that the evolving market conditions and the resulting uncertainty have reduced the relevance of a three-year to five-year outlook,” said Richard Allison, Domino’s chief executive officer, on the earnings call according to a FactSet transcript.
“The reality is that we don’t have visibility into exactly how long some of these new entrants into the quick-service delivery segment are going to benefit from the financial support of aggregators who are seeking to buy market share. These players are currently pricing below the cost to serve, offering free delivery, or other deep discounts that are currently enabled by investor subsidies.”
As a result, Domino’s thinks that longer-term guidance is “instructive” for investors while the shorter outlook provides “more meaningful” guidance.
For the fiscal third quarter, Domino’s Pizza reported earnings and sales that missed expectations.
“Even with softer-than-average results for the quarter, we believe the key focus point from the release will be management’s decision to provide a slightly slower two-to-three-year growth outlook (compared with its traditional practice of a three-to-five-year plan), which is weighing on the shares premarket,” wrote MKM Partners’ Brett Levy prior to the earnings call.
MKM rates Domino’s Pizza shares neutral with a $265 price target.
Domino’s Pizza stock closed up 5.1% in regular Tuesday trading after falling 4% in premarket. The company announced a new $1 billion share buyback program on the conference call.
“The lower growth targets and shorter time frame (two-to-three years versus three-to-five) are an acknowledgement that structural factors fundamentally changed the rate and composition of Domino’s Pizza’s growth,” wrote Bernstein analysts.
“Domino’s Pizza shares have lagged the market year-to-date and the multiple has compressed (though negative revisions have made the compression less pronounced than appeared). While growth targets have been reset, we think any inflection in fundamentals will require strategic shifts.”
Domino’s Pizza stock is up 2.2% for the year to date while the S&P 500 index SPX, -1.56% has rallied 15.4%.
“[W]e’re playing the long game at Domino’s for our investors and most importantly for our franchisees,” Allison said.
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