Domino’s Pizza boss Don Meij was supposed to get a little break from bad news at the end of this week. But the news from the company’s spiritual home wasn’t as good as had been hoped.

Analysts had tipped shares in New York Stock Exchange-listed Domino’s Pizza Inc. would continued their strong run – up a stunning 46.6 per cent this year – and surge to a record high after it delivered its quarterly earnings overnight Thursday.

However, the stock went into reverse, falling 2.4 per cent to $US276.75.

The reason? Weaker than expected international sales.

Domino’s Pizza Enterprises, the ASX-listed stock, which holds the rights to Australia, Japan and big chunks of Europe, is estimated to account for about 30 per cent of DPI’s international sales, and sends royalty cheques back to DPI.

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So the DPI result for the June quarter wasn’t exactly brilliant news for Meij, who has spent much of the week being pilloried for taking home $38 million in the 2017 financial year.

It’s important to note that the international sales result wasn’t exactly bad, with same-store revenue coming at 4 per cent, compared to predictions of growth of 5.1 per cent.

And new chief executive Richard Allison, also pointed out that the growth was driven entirely by more orders, rather than higher prices.

But given DPI’s strong run, it was no surprise that those predictions of a record high quickly went up in smoke after the slight international disappointment.

The US group’s long-term outlook is for same-store international sales of between 3 per cent and 6 per cent, so this quarter’s result is bang in that range, if at the lower end.

Perhaps of a little more concern was that international store growth was slower than expected.

Domino’s wants to grow store numbers by between 6 per cent and 8 per cent over the next three to five years, but in the second quarter, growth ran at just 1.2 per cent.

Allison sees that as a short term blip, and expressed his “confidence and expectation that this will normalise on a full year basis”.

“We’ve had some leadership changes in a number of markets, and frankly, some markets just have been absorbing what was a record amount of growth across 2016, 2017,” Allison said.

“I mean, if you think about it, we opened more than 1,900 net new international stores during that two-year period. So, sometimes markets just need a little time to absorb the impact that that has on the people and their organisation.”

It’s hard to extrapolate too much from the June quarter result international result at DPI in terms of what it means for the ASX-listed stock, which has fell from a high of $80 in August 2016 to $$39 in April, but has since clawed its way back to $50.

The level of information provided by DPI is not very detailed, so it’s hard to see to what degree the slowdown in store growth seen by the US group will be felt in Australia.

But is interesting to see the strategy that has underpinned the surge in DPI’s shares this year is very similar to that employed by Meij in Australia.

Firstly, DMI has invested heavily in technology to make it easier for customers to order and pay, and a gained a clear market advantage from this. This is something Meij has done to great effect in Australia throughout this decade.

Secondly, DMI’s strategy of “fortressing” its US operations appears to borrow much from Meij’s strategy of driving growth by splitting stores in one territory into two.

Allison acknowledged on Thursday night that he has brought this tactic back to the US from offshore.

“The strategy that we’re now pushing forward in the US around fortressing is actually something that a number of our international markets had been doing for some time,” he said.

“So there were some learnings that came out of our ability to carve out territories from existing stores and drive overall retail sales growth in the US market that was spawned out of some of the efforts of some of our high-performing international master franchisees.”

See, there’s still a bit of love in the world for Don – although he better warn Allison store splits have become quite controversial with Australian franchisees.

James Thomson

j.thomson@fairfaxmedia.com.au

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