Domino's (DPZ) caught the market off guard.
The name synonymous with pizza delivery was the ultimate success story in fast food over the past year. Blowout same-store sales (really ungodly same-store sales growth given the maturity of the concept and crowded space) driven by newly-remodeled restaurants and advances in mobile ordering technology. Further, the company has simply executed better than every single fast food competitor as best-in-class CEO Patrick Doyle has worked hard to ensure the company stays humble, hungry and focused on the basics.
But I have to say the slowdown in sales growth for Domino's relative to three months ago is on the concerning side of things from a near-term standpoint. I think that is the real story here, not some earnings miss relative to the estimates of Wall Street analysts.
Here is the backdrop in which Domino's sales slowed.
Burger companies such as McDonald's (MCD), Wendy's (WEN) and Burger King are out there aggressively promoting new value platforms. This tripped up Yum! Brands' (YUM) Taco Bell in the first quarter. I think Domino's has been so resilient to the burger discounting in the recent past because pizza offers a ton of value for the price. The market didn't factor in much of an impact from burger discounting to kick off the year.
Fast-casual pizza players such as Blaze Pizza have continued to post very strong sales growth. I am not saying these upstarts are taking a ton of sales from Domino's, but it's the perception that they are that the market will focus on after a surprising earnings miss.
McDonald's franchise network has come alive, finally. It seems that with each passing day so far this year there has been news of some test of a new menu item that is tailored to meet local preferences. The product news from McDonald's has continued into the second quarter, with news of several Big Mac variations, McNuggets minus preservatives (I am told these will be nationwide by August) and giant spicy wings. Additionally, McDonald's has worked hard to improve its food quality. I have certainly noticed it in my visits.
Pizza Hut is quietly making a comeback in the U.S. thanks to a value-based marketing messages. Keep in mind that Pizza Hut struggled mightily in 2015 as it tried to emphasize ingredient quality when its customer base just wanted to cheap pizzas. Now that Pizza Hut is beginning to gain real momentum, the market may notch down its expectations on Domino's a bit. Note that Papa John's (PZZA) is the loser here. It continues to focus on ingredient quality instead of affordability.
I am not ready to say lighten the load in Domino's. I am talking with Doyle today before noon to get some more color on the results. So, pay attention to my Twitter feed @BrianSozzi for the latest. In the meantime, check out the Dunkin' Donuts (DNKN) quarter. I think Wall Street may come out somewhat upbeat on the stock later this week. I like how the company is moving forward with its new ordering technology, taking aim at Starbucks. The technology could meaningfully unlock sales and profit for Dunkin' later this year and into 2017.