Domino's Pizza is getting eaten alive by the worker shortage

Domino's Pizza (DPZ) just saw sales fall after 41 straight quarters of U.S. same-store sales increases, ending one of the most impressive runs in the fast food industry. That streak ground to a halt largely because of the worker shortage pounding low wage sectors such as retail, restaurants, and hospitality.

Domino's U.S. same-store sales fell 1.9%, a sharp reversal from a 17.5% increase the same quarter last year, the company said Thursday. Same-store sales at company-operated and franchise-owned stores dropped 8.9% and 1.5%, respectively. 

"Yes, staffing has been a challenge most certainly during the quarter as we highlighted," Domino's Pizza CEO Ritch Allison told analysts on a conference call. "What I can tell you is that when you look at the third quarter relative to the first half of the year, we certainly saw more of an impact in the system around some things like reduced operating hours and some challenges with respect to delivery service times in particular. And when we look at it in our own corporate store business, we certainly saw our staffing levels relative to ideal were lower than we saw during the first half of the year."

Allison said Domino's is trying to rectify the staffing challenges, but didn't give many assurances it would be completely fixed anytime soon.

"In our corporate store business, we are doing things proactively, like looking at our wages, compensation for our team members, and as I spoke about earlier, working across the system, rolling out an applicant tracking system to help with team member acquisition and hiring. And then we’re also working on a number of operational improvements inside of our stores to allow us to operate more efficiently and frankly with less labor for every order that goes out," Allison explained. 

The same-store sales weakness led to Domino's missing analyst top line estimates for the third quarter. Third quarter sales clocked in at $998 million compared to analysts' projections of $1.03 billion. Earnings per share came in at $3.24 a share versus estimates for $3.11. 

The earnings beat primarily reflected some $1.1 billion in stock repurchases in the third quarter, which had the effect of reducing Domino's shares outstanding and pumping up profits. In Wall Street parlance, it was a "low quality" earnings beat for the pizza hawking giant. 

Shares finished relatively unchanged at $477.48 on Thursday's session.  

Analysts will probably downwardly revise their sales and earnings forecasts for the rest of 2021 and 2022 as Domino's contends with its staffing issues, which are impacting how aggressive it could be with sales driving promotions. That concern by the Street may keep Domino's stock in the penalty box for now.

"In the near-term, estimates are likely to move lower post-call given negative top-line revisions, which in turn means the stock will likely be stuck in the mud until investors gain further clarity on pricing decisions and the impact on same-store sales." said Wells Fargo restaurant analyst Jon Tower in a research note to clients. 

Tower reiterated his equal-weight (neutral equivalent) on Domino's stock. But he slashed his 2021 and 2022 EPS projections by 3% and 1.2%, respectively. 

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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