Domino’s Pizza CEO taunts venture funded food delivery services

Domino’s Pizza (Domino’s Pizza Stock Quote, Chart, News NYSE:DPZ) missed estimates for its third quarter revenue and earnings but the world’s largest pizza chain will be fine in the long run, says CEO Ritch Allison, who thinks that the venture capital money propping up delivery companies like UberEats will dry up sooner or later.

Share of Domino’s fell and then rebounded strongly in trading on Tuesday as the company released its Q3 financials and announced a reduction in its sales growth targets for the next three years.

Ann Arbor, Michigan’s Domino’s reported total revenue of $820.8 million for the quarter, a 4.4-per-cent uptick, on earnings of $2.05 per share for the third quarter ended September 8. Analysts had been expecting revenue of $823.9 million and earnings of $2.03 per share. (All figures in US dollars.)

At the same time, management lowered its long-term forecast for domestic and international same-store sales growth, going from between three and six per cent for domestic sales to between two to five per cent and from between three to six per cent for international sales to between one and four per cent. Citing market uncertainty, management declined to give a five-year outlook, opting instead for the two-to-three year window.

“We do think that there is some irrational pricing out there in the marketplace right now, funded by venture capital…”

Allison says that competition has been stiff from other Quick Service Restaurants (QSRs) who have been partnering with delivery upstarts like UberEats and GrubHub. But the push to grab market share has meant putting prices below the cost to serve, a formula which is bound to break at some point.

“We do think that there is some irrational pricing out there in the marketplace right now, funded by venture capital,” said Allison, in conversation with CNBC’s Jim Cramer on Tuesday.

“We don’t know how long that will last but as we look out over the next two to three years, at the revised guidance that we’ve given, we’ve got a terrific business model. This Domino’s business model can deliver terrific revenue and earnings growth over that window of time,” he says.

Domino’s had been a spectacular investment for many years, growing its share price from the sub-$10.00 range in 2009 to over $300.00 by August of 2018. Since then shares have trended downwards, with the stock now down almost ten per cent over the past 12 months and down two per cent year-to-date.

Domino’s, which offers a dividend yield of one per cent, has said that it would be cutting down its capital investments by as much as $20 million for 2019, with the plan being to concentrate more on its major investment projects.

Allison says  the company’s balance sheet remains strong.

“We generate over $1 million in cash flow a day, and we also shared on our call earlier today that we’ve tightened up a bit around G&A and around capex as well, which is going to give an opportunity for more free cash flow to float to the bottom line,” Allison says.

“Ultimately, we’re pretty thoughtful about returning that to our shareholders over time,” he says.