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!