Domino’s quarterly profit misses on higher COVID-19 costs

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A pizza comes out of the oven at Domino's Pizza restaurant in Los Angeles

(Reuters) – Domino’s Pizza Inc <DPZ.N> reported a smaller-than-expected profit on Thursday as high pandemic-related costs and staff bonuses offset a jump in demand for pizzas during the coronavirus crisis, sending the company’s shares down about 8%.

The world’s largest pizza chain has thrived during the health crisis as diners staying at home craved more comfort food, but the growth has came at a cost as it spent about $11 million on hiring, bonuses, sick-pay policies and sanitary supplies.

Chief Executive Officer Ritch Allison told analysts he expects elevated costs to continue during the pandemic, adding that international market growth continues to be challenging amid a slower pace of store additions.

General and administrative costs rose 9.5% to $91.7 million in the third quarter, the company said.

“The extent of margin pressure was surprisingly high,” Bernstein analyst Sara Senatore said.

“While we believe this is the appropriate approach for long term worker heath and engagement, it did strip all of the upside.”

Commodity costs also rose 3.8%, with the price of cheese, an important ingredient, hitting an all-time high in the reported quarter.

Sales at Domino’s U.S. stores open for more than a year rose 17.5% in the third quarter ended Sept. 6, exceeding Wall Street estimates of 13.14%, helped by the resumption of sports leagues and more orders through delivery and takeout.

Domino’s has been focusing on tech innovations and added wings, chicken tacos and cheeseburger pizzas to its menu in order to keep its customers from switching to rivals McDonald’s <MCD.N>, Papa John’s <PZZA.O> and Pizza Hut <YUM.N>.

On a per-share basis, Domino’s earned $2.49 per share, compared with the expectation of $2.79, according to IBES data from Refinitiv.

Net income rose about 15% to $99.1 million. Total revenue rose 17.9% to $967.7 million, beating expectations of about $953 million.

(Reporting by Nivedita Balu in Bengaluru; Editing by Aditya Soni and Krishna Chandra Eluri)

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