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Domino's Pizza has one insurmountable challenge

Brian Sozzi
Editor-at-Large

Domino’s Pizza (DPZ) CEO Richard Allison sounds like a man now resigned to the fact that food delivery companies such as Uber Eats will only become more powerful.

Allison quickly told analysts on a conference call Tuesday after another disappointing quarter for U.S. sales that the impact of food delivery companies is unlikely to ease in the future. That’s a shift in tone from Allison, who in April (after another sales letdown) mostly brushed off the rise of what restaurant executives call “the food aggregators.”

Keep in mind that for decades, Domino’s Pizza, Papa John’s (PZZA) and Pizza Hut (YUM) dominated fast food delivery. But with upstart names such as Uber Eats and Grubhub (GRUBdelivering high caloric food from McDonald’s to Chipotle to Dunkin’ Brands, the pizza companies are under siege.

It’s unclear if Domino’s Pizza investors — who for years have been rewarded for the pizza chain’s digital efforts and brisk sales growth — fully get this brutal new reality. But their reaction to Domino’s second quarter results Tuesday suggest they are coming around that reality.

Same-store sales, a key metric for restaurants, grew at a disappointing 3% in the U.S. Consensus estimates were for 4.6% domestic growth in the quarter. Meanwhile, same-store sales internationally grew 2.4%, which also missed analyst expectations for 2.6% growth.

“As a work-in-progress brand, we are constantly striving to improve in needed areas, execute our long-term strategy and build toward Dominant #1 – a goal I continue to feel we are built to achieve,” Allison said in a statement. Not exactly a resounding endorsement on second half 2019 sales growth from Domino’s top pizza maker.

Domino’s stock tanked more than 8% Tuesday afternoon.

“While relative valuation to peers looks attractive compared to historical, decelerating U.S. comp trends likely only heightens investor concerns around the impact from aggregators (or perhaps splits/other), and decelerating comp and sales growth provides little support while other brands are seeing accelerating trends,” UBS analyst Dennis Geiger wrote in a note to clients.

Geiger isn’t expecting Domino’s stock to attract much bullish attention — despite the valuation haircut — until it can show U.S. sales regaining momentum. “We expect valuation recovery and upside from here is likely dependent on U.S. comp momentum accelerating toward solid mid singe-digits and improvement in international same-store sales toward long-term targets.”

Yahoo Finance’s Heidi Chung contributed to this story.

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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