Warren Buffett might be the world’s greatest investor, outperforming the S&P 500 by a 2-to-1 margin over 60 years of investing, but sometimes even the Oracle of Omaha gets it wrong. Or gets in too early.
That seems to be the case with his $1.1 billion investment in Domino’s (NYSE:DPZ), the quick-serve pizza shop chain that just missed big on fourth-quarter earnings.
Buffett bought 1.28 million shares in the third quarter and followed it up with a 1.1 million-share purchase in the fourth, bringing the total value of his holdings to $1.1 billion, but the stock is tumbling 4.5% after Domino’s missed on the top and bottom line.
Competing for customers
Tough competition and discounting to fight for customers hurt Domino’s performance in the fourth quarter
Domino’s reported $1.44 billion in Q4 sales, up 2.9% from the year-ago period, generating $4.89 per share in earnings. A 9.2% increase. On the surface it seems a solid performance, but it missed analyst expectations of $4.93 per share in profits on $1.485 million in sales.
Worse, it saw a charitably lackluster increase in comparable store sales of just 0.4% as competition from fast-food like McDonald’s (NYSE:MCD) and Burger King who pushed value meal offerings, and the impact of a price war, caused customers to seek food elsewhere.
Consumers are feeling the pinch in their pocketbooks as inflation made a u-turn and started rising again and are seeking to stretch their dollars where possible.
If consumer spending continues to tighten and Domino’s can’t innovate beyond its digital and AI-driven logistics, this could mark the beginning of a prolonged slide, eroding market share and investor confidence.
Still rewarding shareholders
Domino’s hiked its dividend 15% in Q4. It has a near-20% CAGR n dividend hikes over the past decade
Although it is a grim assessment, it’s not all bad. Despite the earnings miss, the company still posted solid year-over-year growth indicating Domino’s isn’t in free fall. The pizzeria is still very profitable and it maintains a strong market position as the largest pizza chain globally, with over 21,000 stores and over $4.7 billion in revenue.
Domino’s also hiked its dividend 15% to $6.04 per share, continuing a decade-long-string of double-digit increases. It has grown the payout from $0.80 per share in 2013 to where it stands today while only 35% of its free cash flow is used to support the dividend. That highly suggests it is both secure and offers significant opportunity for even more future growth.
The dividend yields 1.3%, which signals ongoing confidence in its cash flow, offering a buffer for income-focused investors.
U.S. retail sales also grew 6.6% through the first three quarters of 2024, outpacing the QSR pizza category’s less than 2% growth, and Domino’s continues to dominate in online ordering, AI-driven logistics, and its delivery model. These are competitive advantages that could rebound with better economic conditions.
Yet it also indicates that just because a company incorporates AI into their business, it isn’t going to result in automatic payoffs. It could provide a reality check for other businesses thinking about integrating AI into their own operations on the belief it is some magic elixir.
Prospects for a turnaround
If Domino’s doubles down on its “Renowned Value” strategy, leverages its global store expansion (it opened about 90 U.S. locations and over 300 international ones), and navigates price wars effectively, it could regain traction.
Its biggest problem is valuation. DPZ stock goes for 28 times trailing earnings, 29 times estimates, and over 3 times sales. The restaurant industry average for P/E is 20 and for P/S is 1.3. As the leader in the pizza space, it arguably is worth the premium, particularly based on its historic success.
Domino’s is in a difficult, but not hopeless position. The earnings miss is a yellow flag that should have investors taking notice as it signals short-term challenges. Consumer demand and competition are dragging it down currently, which will impact its stock price, but the pizza chain is still a good long-term buy. The new, discounted price should be considered a buy point.
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