Restaurant Recession? Pizza Party!

Domino's and its rivals keep selling even when other eateries clear out.
At Closing, June 15th
166.46 USD

Restaurants are having a pretty unappetizing earnings season. 

Fifteen of the 16 restaurant chains that have reported second-quarter earnings so far said sales were down from a year ago, or that growth had slowed from the previous quarter. For the first time since 2009, average comparable sales for the group turned negative.

The downbeat results prompted Stifel restaurant analyst Paul Westra to deem it the start of a "restaurant recession."

Earlier this month I warned the rapid growth in restaurant sales may have hit its peak as declining grocery prices spur consumers to make more meals at home. I suggested the world's largest fast-food chain, McDonald's, could be one of the few to thrive in a slowdown by using its might to beat weaker competitors.

But McDonald's won't be alone atop the food chain in a restaurant downturn: Pizza joints will be up there, too. 

Rising Dough

Domino's and Papa John's stocks are up around 30% year to date, compared to a 6% rise in the S&P 500

Source: Bloomberg

Domino's, for example, is the only chain in the Bloomberg Intelligence restaurant index, of those that have reported so far, to say sales growth accelerated in the second quarter. Sales at established U.S. locations rose by nearly 10 percent from the year before, marking the ninth consecutive quarter of growth above 5 percent. Stripping Domino's out, average comparable sales growth for restaurants in the BI index in the second quarter is negative 1 percent. Competitors Papa John's and Papa Murphy's report earnings this week. 

Check, Please

Restaurant sales were flat in June, marking the lowest sales growth since March 2013

Source: Bloomberg and MillerPulse

Bloomberg Intelligence analyst Michael Halen points out that pizza chains typically do well when consumers cut spending due to their value proposition -- there aren't many ways to feed a family on $7.99, which is what a 3-topping large pie will run you at Domino's. Pizza Hut and Papa John's are hawking two medium pizzas at $6.99 each, while Domino's offers that same duo for $5.99. 

Those deals remain competitive even as burger joints and other chains increase promotions.

Tasty Sales

Domino's sales growth has topped 5% for nine straight quarters

Source: Bloomberg

Pizza chains have also been quick to adapt to changing technologies, realizing the only thing more important to strapped consumers than price is convenience.

Leading the digital charge is Domino's, which rakes in half of its U.S. sales through digital ordering, up from a third in 2012. Digital ordering lets Domino's better target offers to customers and serve a greater variety of items. It helps Domino's get accurate orders and keep labor costs low. 

The laziest of customers can now order a pizza without ever getting off the couch, whether by sending a pizza emoji on Twitter, relaying an order via their car operating system, or using Amazon's voice-controlled Echo speaker. (Alexa, get me a cheese pizza with mushrooms.) 

Domino's has also sunk a lot of dough into making its pizzas taste better since its CEO admitted in 2010 that its pizza was "devoid of flavor." It vowed to improve and introduced new recipes with better ingredients. Sales volume has risen for seven straight years, according to Halen.

Customers have liked the changes, and so have investors: Domino's shares have gained 1,200 percent since its menu-improvement campaign began, compared to a 110 percent increase in the S&P 500. So far this year, shares are up 33 percent, compared to a 6 percent rise in the S&P 500. 

But while restaurant-goers might eat cheap at Domino's, investors who want a piece of it will pay a premium. The company's stock trades at 32 times forward earnings, compared with its five-year average multiple of 28. By comparison, Papa John's and McDonald's are trading at 29 and 20 times forward earnings, respectively. 

But with pickings slim for growth elsewhere in the restaurant industry, pizza may still be one of the best choices on the menu. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at

    To contact the editor responsible for this story:
    Mark Gongloff at

    Before it's here, it's on the Bloomberg Terminal.