Domino's shares slide as same-store sales disappoint

(Reuters) - Domino's Pizza Inc DPZ.N reported its slowest U.S. same-store sales growth in at least three years in the second quarter, driving shares lower and raising doubts about its strategy for fighting off competition from delivery apps.

A Domino's Pizza restaurant is seen in Los Angeles, California, U.S. July 18, 2018. REUTERS/Lucy Nicholson

UberEats, DoorDash and GrubHub Inc GRUB.N have all pushed into the delivery business, which had been at the heart of Domino's expansion into the world's biggest pizza chain.

The company has responded with a strategy it calls “fortressing”, which aims to speed up delivery times by opening more stores near existing ones.

That, however, has come at a cost - a hit to sales at its existing outlets that last year knocked up to 1.5 percentage points off same-store numbers.

In the second quarter of 2019, total U.S. same-store sales rose just 3%, below estimates and the slowest growth in at least three years.

Comparable sales at company-owned U.S. outlets grew 2.1%, while those at U.S. franchise stores rose 3.1% in the quarter ended June 16, also both below expectations while those in international markets were up 2.4%, in line with expectations.

Bernstein analyst Sara Senatore said comparable sales of 3% was at the low end of the company’s long-term targets for the United States.

“(This) will not refute the bear case that structural factors — better pizza competition, growing aggregators, and market splits - have fundamentally changed the rate and composition of Domino’s growth,” she said.

The company’s shares were down 4.2% at $258.69 in morning trade, having gained about 9% so far this year.

Total revenue rose 4.1% to $811.6 million in the quarter, also below expectations of $836.6 million.

Net income rose to $92.4 million, or $2.19 per share, from $77.4 million, or $1.78 per share, a year earlier.

Analysts had expected the Ann Arbor, Michigan-based company to earn $2.02 per share.

Cowen & Co analyst Andrew Charles said Domino’s needed to make clear to investors what the impact of the fortressing strategy would be on same-store sales this year if it wanted to head off a further decline in confidence.

“Failure of the company to address this could lead to the bear narrative around infringement from third-party delivery to dominate, and thus place shares in the penalty box,” he said.

Reporting by Aishwarya Venugopal and Soundarya J in Bengaluru; Editing by Arun Koyyur and Patrick Graham