Tuesday, December 18, 2007

A Perfect Storm for Falling Domino's

October 16, 2007
Domino's Earnings Arrive Cold
Domino's third quarter earnings didn't deliver, and weren't very filling.

Let's do some back of the envelope calculations on how our gut might think things are going in this latest quarter. (The gut would seem more important than the brain due to this being a food company perhaps.)

First up, farm prices received from November 2006 to November 2007.

Wheat, All: +73% ($4.59 to $7.92)

Tomatoes: +78% ($28.10 to $50.10)

Next up, cheese.

Commodities Wrap: Cheese Prices Jump
The average price of a 40 pound block of cheddar cheese _ the standard U.S. Department of Agriculture cheese measurement _ rose nearly 6 cents to $2.04 per pound in the past week, according to a USDA report Friday. That's well ahead of the price of cheese at the start of the year, when the average price was closer to $1.30 per pound.

And finally, Domino's delivers. Here's the change in gasoline price from December 18, 2006 to December 17, 2007.

Gasoline: +29% ($2.366 to $3.05)

Now let's tack on falling inflation adjusted median incomes, a housing bust, a credit crisis, and an increasingly tapped out consumer (due in part to the rising prices shown above and as verified by seemingly poor retail sales during the holidays). Storms just don't get much more ominous than that in my opinion.

Of course, the market is attempting to price a lot of this storm into Domino's. Unfortunately, I think the rest of the market is still working under the assumption that the pain is contained. I'm not nearly so confident.

Dominos Pizza Inc. (DPZ) Chart

Source Data:

Agricultural Prices
Weekly Retail Gasoline and Diesel Prices

Update: I said falling median incomes but meant falling inflation adjusted median incomes. Normally I'll just fix typos silently but that was more of a blunder. Sorry!


Anonymous said...

Mark the next this to hit them will be the containers they put the pizza in and napkins.

Voracious demand for books and a crackdown on small, polluting paper mills have caused a paper crunch in China, pushing up the price of paper by 10 percent so far this year and forcing printers to delay books and publishers to raise prices. So far, the problems have been largely confined to China, but experts say that if the trend is unchecked, publishers worldwide could find themselves paying higher costs — and consumers facing higher book prices.


Anonymous said...

As a pizza industry GM, I think I can offer a little insight-

In addition to all of the costs you mentioned, in the last year, our store has seen increased meat prices (beef, pork, and chicken), increased labor prices (30% minimum wage increase in our state in one calender year - delivery drivers make minimum wage), a 1% local sales tax option (for the schools), and don't forget a significant increase in the price of soybean-sourced shortenings and oils (especially refined soybean oil, which is used to cook pan pizza).

We raised prices just 6% at the beginning of the year, enough to hedge the first 15% of the minimum wage increase.

At last count, there are twenty-nine restaurants that serve primarily pizza in our metropolitan area of ~100,000 people. Want to start a pool on how many are left in one year?

Stagflationary Mark said...


I knew there was a reason toilet paper, paper towels, and napkins are always on my Costco list (other than the fact that those non-perishable items are easily hoarded if you've got the space for them).

Stagflationary Mark said...


Want to start a pool on how many are left in one year?

Good grief. Your list also makes a perfect storm. If it is any consolation, I know it isn't just happening here.

I refer you back to a previous post I did in early December.

Korean Cheese Crisis
Unable to bear the increasing costs, a great number of small pizzerias have gone out of business.