The pandemic lifted Domino's sales. But that's not the full story

People are flocking to America's biggest pizza chains in the pandemic, and that should be great news for Domino's.

Posted Updated

Danielle Wiener-Bronner
, CNN Business
CNN — People are flocking to America's biggest pizza chains in the pandemic, and that should be great news for Domino's.

But just as Covid-19 has people buying more pizza, it has led to higher costs for everything from cleaning supplies to worker pay. Ingredient costs have also fluctuated: The company said cheese prices have been swinging wildly during the pandemic, going from an all-time low at one point to an all-time high last quarter. And that's meant Domino's increased sales have muted profits that disappointed Wall Street. The pizza chain's stock dropped about 7% Thursday after it announced its earnings for the third quarter. The company reported a profit of $2.49 a share, falling short of the $2.79 that Wall Street had expected. That's despite sales surging almost 18% in the quarter.

"The total impact from safety and cleaning equipment, enhanced sick pay and other compensation for our team members and support for our franchisees and our communities was $11 million," CFO Stuart Levy said during an analyst call discussing results. The company expects those costs to remain for the duration of the pandemic.

The ultimate quarantine food

Even though the company's profit was lower than expected in the latest quarter, analysts are bullish on Domino's long-term potential.

Pizza is the ultimate quarantine food: It travels well, can feed a whole family and holds up as leftovers. That's been particularly good for Domino's.

"They to me have stood out among all the chains," said Morningstar restaurant analyst R.J. Hottovy.

Over the years, Domino's made a number of decisions that have set it up for success now, Hottovy said. Even more than other pizza chains, it invested in digital infrastructure. The chain has rolled out unique features like "hotspots," which let people order pizza to the beach and other outdoor locations, and has tested out self-driving delivery cars.

It's also using a "fortressing" strategy, Hottovy said. That's when chains set up numerous locations in one area, so that most residents are within delivery range of a Domino's. And new menu items, like chicken taco pizzas, cheeseburger pizzas and chicken wings, have done well.

"Our wings and our two new specialty pizzas have been very well received by our customers," said CEO Richard Allison during Thurday's call.

"You haven't seen us promote wings because we're selling all the wings that we can get our hands on today," he added.

Last year, Domino's held 27% of the market among large pizza chains, according to foodservice data firm Technomic. Pizza Hut was next on the list at 21%, followed by Little Caesars at 15% and Papa John's at 10%.

Charles Winship, senior research analyst at Technomic, said that the firm projects that both Domino's and Papa John's will gain market share this year. But Technomic expects Domino's to remain in the top spot. The chain is "building up a pretty good lead over the rest of the category," said Winship.

Papa John's has seen sales jump during the pandemic at an even higher rate than Domino's. In the three months that ended on September 27, sales at North American stores open for at least a year popped nearly 24% compared to the same period last year. But Papa John's was still recovering from its dismal 2018 last year. In the third quarter of 2019, Papa John's had positive comparable sales growth for the first time in two years.

But Domino's isn't the only one facing some issues related to the pandemic. In an August call discussing its second quarter earnings, Papa John's mentioned that labor costs ate into its profit.

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