Sneak Preview: Admit It When It's Too Hard

The real lesson here is that it's way too hard to figure out restaurant same-store sales. There are too many factors that go into producing those numbers, factors about consumer spending and eating habits that we just don't have much good information about as well as information about the success or failure of specific retail promotions. ... If even the Pizza Man can't game his own same-store sales, I can't think of a reason why anyone else should be able to. That's why I don't want you trying to invest in stocks based on this metric -- it's too hard.

The problem extends beyond Domino's; it even extends beyond companies that get their same-store sales wrong. I've seen similar things happen at both Panera Bread(PNRA Quote) and Starbucks(SBUX Quote).

Panera Bread had been one of the best regional-to-national growth stories in the restaurant business, and I'd been totally behind the company. But when they reported their second-quarter earnings on July 25, 2006, they also gave weak same-store sales guidance for the next month and for the rest of the year. The company also expanded the range of its expected full-year earnings downward, but it was the same-store sales guidance that killed the stock, which lost almost 12 percent of its value overnight. Panera thought it would do better, but because of a new product rollout, it had to knock down the forecasts. Panera had predicted that its new product would sell better and cost less than it did. When the results were in, they crushed the stock. Who could have predicted that?

The same thing happened to Starbucks not long afterward when they changed their menu. Again -- not predictable. Who would want to try to game that? These restaurants are just sitting ducks without much control over their own destiny. You can invest in them over the long term, but trying to game short-term metrics like same-store sales has only ever brought me a world of hurt.