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Domino’s Costs Are Rising, But You Shouldn’t Worry

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It isn’t an everyday occurrence that a company reports strong revenue and profit gains and experiences a sharp decrease in the stock price, falling 7% for the day. Yet that’s exactly what happened after Domino’s Pizza (NYSE:DPZ) released its fiscal third-quarter 2020 results, which covered the period that ended on Sept. 6.

This seemingly incongruous situation may leave you scratching your head. So it’s a good time to look deeper into the report to see if there is anything that’s concerning.

Demand remains strong

With strong roots in delivering pizzas that go back to its founding 60 years ago, it shouldn’t surprise anyone that Domino’s has done well during the pandemic. Excluding foreign exchange translations, its third-quarter total sales grew by nearly 15%. Broken out geographically, U.S. same-store sales (comps) rose by 17.5% and were more than 6% higher internationally.

It is not merely the pandemic that is boosting sales, however. Domestic comps have increased for 38 straight quarters, and international operations have increased for 107 consecutive quarters.

Domino’s provides inexpensive offerings, which go beyond pizza to include items such as chicken, sandwiches, pasta, and desserts. It also constantly tinkers and updates its menu. For instance, it launched a chicken taco pizza and cheeseburger pizza during the summer. As the results show, its prices and products are resonating with customers.

Some investors were disappointed that the sales weren’t as robust as those of Papa John’s International (NASDAQ:PZZA). But it’s hard to make a judgment about one quarter, and besides, Domino’s showed excellent sales growth over an extended period.

Higher costs

Investors also didn’t like the elevated expenses during the quarter, caused primarily by higher wages and sick pay for Domino’s store employees due to the pandemic.

This doesn’t concern me, though. For starters, despite increased expenses, Domino’s earnings per share