In a deep recession one would think that consumers would turn to deep dish pizza as a cheap alternative to other more expensive dining options. You can feed a family for less than $10 bucks. Pizza may not be all that healthy, but it sure is hearty.
I know I’m eating more pizza. Are you?
Well, it appears that more of you are actually eating less pizza these days, and that is surprising. Dominos Pizza Inc. (DPZ) reported earnings for the quarter ending September 7th that showed sales slowing significantly.
For the period, the company earned $0.17 per share as opposed to analyst expectations of $0.21 per share. More troubling was the sales decline. Same store sales for domestically owned stores fell by 3.4% and dropped by 6.4% for franchise stores in the U.S.
The silver lining, I guess, was growth of the international division by 5.4%. I guess the pizza fad is gaining steam in other countries, just not here.
The company blamed a slow economy for the performance. That may be so, but the economy was still growing as best we can tell during this quarter of performance. The numbers also do not reflect any of the impact from the current credit crisis.
Shares of DPZ fell more than 25% on the news and are now more than 50% lower than highs reached in the last year. That the stock is down in this bear market is not a shock. What is surprising, is that the company stumbled at a time when it should be doing very well against the competition.
A slowing economy is no excuse. Sell those pizzas!
It is interesting to note that the company is indeed impacted by the credit crisis. Franchisees looking to expand are finding it more difficult to obtain funding. As a result, DPZ is exploring filling the vacuum with what they are calling very non-material bridge financing.
Admitting that the company is in uncharted territory, DPZ is adjusting to a new world given the credit crunch in the banking system. As management stated, there is no interest in becoming a bank themselves, but what else can you do.
The fact that they are in uncharted territory is obviously causing consternation for investors. S&P dropped their ratings from "hold" to "sell"
citing DPZ’s decision to increase advertising in order to restore sales growth.
In a period of slow to negative growth, selling pizza via a larger advertising budget is actually a wise strategy. As I mentioned above, eating pizza is a great alternative for the budget conscious consumer.
Frankly, I would expect DPZ to take advantage of its product edge in this time of tight budgets. With the stock trading lower due to poor operating performance, owning DPZ now may make sense.
If the recession is long and deep, the company may sell more pizza than is currently expected. I would view the stock as a defensive play in these troubling times. The selling this week was overdone irrespective of the disappointing results.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
