Domino’s And Papa John’s Earning Reports Disappoint Investors

Key Takeaways:

• Domino’s Pizza and Papa John’s saw share prices fall after releasing earnings reports on Thursday
• Both companies missed Wall Street analyst sale targets
• Pizza fans should expect modest price increases as both companies raise prices to combat increased food and labor costs

On February 23, 2023, Papa John’s and Domino’s Pizza released disappointing earnings reports. Both companies missed critical metrics on sales, and their respective stocks fell.

Investors are still digesting this news, but the outlook appears to be concerning. We’ll cover what was in the reports and what it could mean for investors as 2023 continues.

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Domino’s earning recap

Domino’s witnessed a high level of demand during the COVID-19 lockdowns and reaped record profits as a result. The stock hit an all-time high of $564.33 in 2021, but recent results show profits will continue to drop.

Currently, the stock is far from its high as the company reports delivery woes and a decrease in demand within the 2022 Q4 report. The stock fell 11% Thursday after the earnings report was released.

A unique problem the company is facing is that they need help finding enough employees for delivery positions. This problem can be easily fixed using third-party alternatives like DoorDash or GrubHub, but the company has yet to announce a potential solution.

For guidance, Domino’s cut its two-to-three-year sales outlook to a range of 4% to 8% growth from 6% to 10%. Here’s how Domino’s did on the numbers compared to analysts’ estimates:

• Revenue: $1.39 billion vs. $1.44 billion expected
• Adjusted earnings per share: $3.97 vs. $3.94 expected

Papa John’s earning recap

Papa John’s did not fare much better than Domino’s, and their stock sank by 6% on Thursday.

Papa John’s CEO Rob Lynch said, “We had a strong finish to 2022, posting our third straight year of positive North America comparable sales.” Lynch added this concerning the future outlook “Looking ahead to 2023, we will continue to grow on top of the solid foundation we have built over the past three years as we deliver on our strategic priorities and build the world’s best pizza company.”

Stock value dropped due to a pessimistic view of demand. The company believes consumer confidence will slip in the next few months, blaming rising inflation, high interest rates and increased labor costs.

International sales were up, and the company revenues increased by 2.8% or $1.20 billion. Papa John’s is optimistic that it will grow in the long term. The company also noted they see food prices going down and stated this might be a hidden benefit.

In the quarter’s report, positive numbers were announced when compared to analyst projections:

• Revenue: $526.2 million vs. $523.8 million expected
• Adjusted earnings per share: $0.71 vs. $0.66 expected

Possible solutions to temporary problems

As both companies reported, the obstacles are stacking up and future guidance is low. Food costs are rising, creating margin pressure for the companies as they either have to find new alternatives for food sources, raise prices or take a hit on profit margins.

So far, the projection is that prices will increase and may continue to increase if inflation and interest rates keep rising.

The labor market is tight, leading to higher costs when finding talent. Domino’s will need to consider third-party alternatives to keep up with the current demand or raise the pay rate to attract more workers.

Unfortunately, the costs of food are outside the influence of these companies, and they will have to eat the extra costs or pass the crumbs to customers. Luckily, both companies have complete control over the menu. This might provide an opportunity to try different food items that deliver the same quality and provide wider margins.

Minimize risk in a volatile market

In these volatile times when even pizza, a national gem, is showing signs of weakness in the market, it’s essential to diversify your portfolio. This investment strategy works to manage risk while capitalizing on gains.

A wise investor will understand they should never put all their eggs in one basket. For example, a tech-heavy investor likely did well during the pandemic but saw their portfolio crash early last year.

Tools like Q.ai are taking advantage of AI to help diversify your portfolio using Investment Kits that fit any investing goal. Consider downloading Q.ai to learn more about diversification. You can also utilize Q.ai’s Portfolio Protection to create a stronger portfolio that better weathers the storm of an unpredictable economy.

Should you invest?

When deciding if you should invest, it’s imperative to understand that the pandemic environment was unique and favored restaurants that could deliver food. Both Domino’s and Papa John’s benefitted from that and saw their stock values hit highs as a result.

Nevertheless, deep research must be done before accepting the risks of investing in these companies as they face pricing and employment issues. While around three billion pizzas are sold in the U.S. annually, putting the pizza industry in high demand, this doesn’t mean investing in this sector is risk-free.

Long-term investors are likely safe if they give both companies time to weather the current storm. The appetite for pizza in America is still high, and the industry can do well again when prices decrease. Short-term investors looking to make a profit will take on more risk until there is more certain data about alternatives for both companies.

Bottom Line

Shareholders in Domino’s and Papa John’s saw their portfolios take a hit this week when both companies released their earnings reports. While the short-term outlook for these stocks isn’t optimistic, the long-term potential is there as long as the pizza makers can overcome the obstacles they are currently facing.

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