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Domino's Pizza Has A Problem: Cheese Inflation

In what was an otherwise solid third quarter for Domino's, the pizza giant said expensive cheese plagued its bottom line. And the company sees little relief on the mozzarella-stuffed horizon.

Posted on October 14, 2014, at 1:13 p.m. ET

Back in 2009, as Americans were reeling from a recession, Domino's was doubling down on bringing the cheese. The pizza giant, whose stock price has increased tenfold in the five years since to around $80 per share today, said at the time that it was listening to its customers, as well as milk industry marketing group Dairy Management, Inc., and adding more cheese to its pizzas.

But now, Domino's may be regretting its cheese-heavy strategy. The price per block of the yellow stuff has skyrocketed in recent months, causing a drag on the company's otherwise solid third-quarter earnings.

"Overall, the momentum we have going right now feels pretty good. It's helping to moderate some of the concerns over increased commodity prices, particularly cheese," J. Patrick Doyle, Domino's CEO, said on the company's earnings call this morning. "Cheese prices are certainly higher than the experts had expected at the beginning of the year, but higher sales have helped mitigate the impact."

Specifically, the company said the average cost for a block of cheese was $2.04 per pound in the third quarter, up 32 cents per pound over the same period last year. And according to Chief Financial Officer Michael Lawton, cheese prices do not appear to be going down any time soon.

"With cheese prices straying higher than expected, we expect Q4 costs to also increase at a similar pace," Lawton said on the call, "and we expect the full-year market basket to be up 4% to 6% over last year."

Looks like it will be tough cheese for Domino's Pizza's bottom line for the rest of the year, at least when it comes to its most abundant and, arguably, delicious supply chain item.

The dairy marketing group responsible for adding more cheese to Domino's pizza is Dairy Management Inc. An earlier version of this story misstated the group's name.