Call me superstitious.
Having just wrapped up the second quarter, I happened to score an email from Domino's (DPZ) saying it has launched a new 50%-off pizza promotion. This struck me for a number of reasons.
First, considering that I often talk with the folks at Domino's, I know the company doesn't normally run these types of traffic-driving promotions. The company's two years of juggernaut results have been mostly fueled by a consistent price message and discipline on the menu. Competitors such as Yum Brands' (YUM) Pizza Hut, Papa John's (PZZA) and Little Caesars have been much more out front with discounts.
So, when I see something like a 50%-off pizza promotion by steady Eddie Domino's a couple of weeks after the quarter ended, caution flags go up. To me, it's a sign the quarter was mixed, and the company is looking to accelerate its business early in the third quarter and possibly tell analysts on the earnings call that sales bounced back.
As to why the second quarter for the often super-dependable Domino's may have been sluggish, well, it boils down to a few factors. The fast-food industry had quite an interesting past three months consisting of new sandwich offerings from Dunkin' Donuts (DNKN) , Starbucks (SBUX) , McDonald's (MCD) and Burger King (BKW) (and many others I am neglecting to mention). The innovation coming from the burger and coffee players -- and to a lesser extent Taco Bell -- this year has been impressive. Couple that with a barrage of discounts from these guys in the quarter during a well-publicized industry slowdown, and Domino's may have felt an impact (which I think it saw in the first quarter). Keep in mind, the stock got toasted back in April as the company posted surprisingly slower same-store sales and mixed headline earnings results due to heightened competition and tough financial comparisons.
The fast-food industry wasn't too savory in the second quarter. Visits to fast-food restaurants -- which comprise of 80% of the U.S. restaurant industry -- failed to grow in March, April or May. Analysts have been slashing estimates for sales and earnings across the board, most notably McDonald's. Talk about worrisome for a sector that is offering the biggest amount of calories for the lowest possible price to families. More worrisome, perhaps, is that visits to fast-casual restaurants, a sector dominated by the likes of Chipotle (CMG) and Panera Bread (PNRA) -- posted a monthly traffic drop in May. That represented the first decline for the fast-casual space since 2004. Ouch.
Fine company is Domino's, but I am not sure it's a fine stock to own in front of the second-quarter earnings release. The stock is nicely off its April lows, so optimism has crept back into the notion of the company having a rebound quarter sequentially. Moreover, shares are still valued as if the company's growth rates are continuing to accelerate (they are increasing, but by slower rates). Based on everything I have seen floating around, Domino's will be hard pressed to live up to the market's ingrained optimism (at least near term). Maybe ponder Buffalo Wild Wings (BWLD) -- at least it's experiencing nice deflation for chicken wings. Note I said ponder -- the company has not been living up to expectations of late, and strikes me as a show-me-type stock here.