Domino’s stock sinks on disappointing sales, fanning doubts about expansion strategy

Domino’s stock fell Tuesday after the company reported weaker same-store sales growth as it expands its store base and grapples with the threat of third-party delivery.

Shares of the pizza delivery chain fell more than 7% in premarket trading but recovered some of those losses after the market opened. Domino’s stock, which has a market value of $10.7 billion, is down 5% over the last year.

To hold onto its spot as the world’s number one pizza chain, Domino’s has been carrying out a strategy that it calls “fortressing.” Under the strategy, stores are added to existing markets to be closer to customers, making deliveries faster and theoretically increasing driver tips.

Skeptics argue that Domino’s aggressive expansion leads to cannibalization, negatively impacting same-store sales growth. During the second quarter, the restaurant company said that domestic same-store sales grew by 3.0%, falling short of Wall Street’s estimates of 4.8%.

“It was a good second quarter, particularly for global unit growth, as we continue to seek balanced retail sales growth through the blend of same store sales and store growth,” CEO Ritch Allison said in a statement.

Domino’s added 200 net new stores during the quarter, including 42 new U.S. locations.

With the rise of third-party delivery services, the pizza chain has not only been battling for customers from rivals Pizza Hut and Papa John’s, but also every restaurant using Uber Eats, DoorDash and GrubHub. On last quarter’s conference call, executives said that national marketing campaigns from third-party delivery apps put pressure on domestic same-store sales growth.

Net sales during the second quarter rose 4.1% to $811.6 million, missing expectations of $836.6 million. While sales at stores open at least a year fell short, sales at all U.S. stores grew by 6.8% during the quarter.

Domino’s reported net income of $92.4 million, or $2.19 per share, up from $77.4 million, or $1.78 per share, a year earlier. The pizza chain topped the $2.02 per share expected by analysts surveyed by Refinitiv.