The Ratings Game: Domino’s Pizza is having a hard time finding delivery drivers and it’s hurting sales

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Domino’s Pizza Inc. says it’s having difficulty filling delivery driver jobs and it’s impacting sales and causing analyst concern, with Credit Suisse downgrading the stock to neutral from outperform.

Credit Suisse slashed its price target to $475 from $570.

On the Tuesday earnings call, the company
DPZ,
-0.77%

discussed feeling the squeeze of labor pressure and the steps it’s taking to work around the challenges.

“We are also sharing operational best practices to eliminate unnecessary and time-consuming tasks in the operation of our stores, tasks like pre-folding boxes that could drive both team member and customer satisfaction,” said Ritch Allison, Domino’s outgoing chief executive, on the earnings call, according to a FactSet transcript.

“We now have over two-thirds of our stores who are not pre-folding boxes, saving an estimated 30 to 40 hours per store, per week in labor. The objective of this initiative is to keep drivers in their cars and on the road, while working as much as possible.”

See: Applebee’s parent Dine Brands swings to a profit

Still, there are business repercussions to the driver shortfall. Delivery same-store sales fell compared with 2020, with order count a primary driver. However, delivery same-store sales were still up about 10% compared with 2019.

“We believe that the staffing challenges that I referenced earlier had a disproportionate impact on our delivery business in Q4,” Allison said.

The staffing challenge is expected to persist into the future.

“[W]e believe that delivery driver staffing may remain a significant challenge in the near-term as the labor market continues to evolve,” said Allison.

“We are conducting a full assessment of the driver labor market and potential additional actions to relieve the existing constraints on our business.”

Many companies turn to third parties like DoorDash
DASH,
+0.66%

to help with delivery. Credit Suisse doesn’t think Domino’s will take such a step.

“Domino’s is facing outsized labor challenges given heightened competitive activity for delivery drivers and we have limited visibility into the timing of an improvement as dynamics appear to be somewhat structural in nature and Domino’s is unlikely to supplement with third-party driver networks as it seeks to maintain control of the customer experience and its delivery infrastructure is a competitive advantage,” analysts wrote in a note.

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MKM Partners also highlighted the difference between the performance of fully staffed Domino’s stores versus those that are not.

“Stores in the top 20%, those that are essentially close to fully staffed, produced an average Q4 same-store sales increase of almost 6%,” Allison said on the call.

“By contrast, stores in the bottom 20%, those that are facing the most significant labor shortages, saw Q4 same-store sales decrease by an average of almost 7%.”

MKM maintained its neutral stock rating and $490 fair value estimate.

“Domino’s continues to work through its labor situational fixes, after last year’s compensation moves, but did not provide convincing evidence of a game plan, in our view,” Brett Levy wrote in the MKM note.

“We applaud a willingness to re-evaluate how best to attract/retain staffers, but competition remains fierce as most across the marketplace are targeting additional hirings as well.”

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Not all analysts are as concerned. RBC Capital Markets says “with the worst of the current quarter’s headwinds having seemingly passed, incremental pricing actions announced today, and expectations/valuation re-based, we see risk-reward as compelling here.”

RBC rates Domino’s stock outperform, but lowered its price target to $525 from $550.

Domino’s said that it will raise the price of the delivery “Mix & Match” offer to $6.99 from $5.99. The company also offers carryout service.

Domino’s stock shares fell 3.7% during Wednesday trading, but have gained 21.3% over the past year.

The benchmark S&P 500 index
SPX,
+1.84%

is up 11.9% for the last 12 months.

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