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Domino’s U.S. comp sales growth came in slightly below the street’s expectations with company-owned same-store sales growth up 8.3% but management’s tone continues to be extremely positive.  Management did not provide any color on quarter-to-date trends, but repeatedly commented that it thinks the current momentum behind its new and inspired pizza product is sustainable.  Specifically, management said, “We really like where we are….We are performing better than most or all within the pizza category.”

Even with same-store sales growth up over 8%, both one-year and 2-year average trends slowed rather significantly from the first quarter when the comp was up 14.7%.  This sequential slowdown spurred a lot of questions and concern on the earnings call about the sustainability of top-line trends.  Management defended its recent performance by pointing out that the new pizza is not a promotion and is driving significant repeat visits with the majority of the sales growth in 2Q10 driven by repeat customers and increased frequency relative to the heavy trial period during the first quarter. 

Relative to guidance, management stated that its full-year 2010 results should come in better than its stated long-term outlook on a lot of fronts, driven by a higher than typical range of comp growth in the U.S.

Pressure in 2H10:

Management reiterated its outlook for cheese prices to be in the $1.50 to $1.70/lb range in the back half of the year.  Although cheese prices remained below this level in the first half of the year, cheese is currently at $1.60/lb.  Management also stated on the call that for every $0.40 move in the price of a block of cheese, there is a 100 bp impact on food costs at the store level.  Relative to the recent move in wheat prices, DPZ locked in on all of its wheat needs through the first quarter of 2011. 

Foreign currency benefited earnings by about $0.02 per share in 1Q10 and a penny in 2Q10 but management expects this trend to reverse in 2H10 with currency hurting by a penny or two during the fourth quarter.



Howard Penney

Managing Director