COVID-19 lockdowns and restrictions created a positive environment for delivered food ordered online. Domino’s cashed in handsomely but now the unwind effect is slowing sales as economies re-open. The company’s trading update confirms the softening trend.
We previously identified Japan as the market most likely to see a fall in sales given an estimated half of its 40% sales surge in the last two years was attributable to COVID-19 sales.
Japan’s state of emergency expired on 30 September so it is not surprising that DMP possibly saw negative sales growth in October. Although this is just one month, we contend that the company’s commentary on Japan leaves plenty of room for uncertainty.
For this reason, it is instructive to consider sales growth trends over a two year period to try and determine the outlook for SSSg (same store sales growth). In that context, DMP’s trading update at the annual meeting shows SSSg +4.3% so far this year compared to 8.4% for the same period last year and 12.7% over the two year period. The more open economies become throughout the year, the more likely SSSg is to decline and this is the trend we expect to see in FY22f.
An emerging issue for DMP is the pace of its store network rollout ambitions. In FY21 for example, DMP opened so many new stores that only 29% of its store base was included in its SSSg calculation. So, 71% of its stores were impacted by nearby new store openings, potentially cannibalising sales. This is shown up through average sales per store growth being much lower than SSSg.
DMP’s current goal of adding 500 new stores in FY22f will be a record year if achieved but it might be too ambitious. So far, it has opened 220 new stores which includes 156 stores acquired in Taiwan.
Investment view
The hibernation is over and that means SSSg will slow down and even turn negative in some circumstances. DMP’s share price is a function of new store openings, same store sales growth and earnings. As sales have now begun to slow down or even decline, we expect to see the PE ratio fall from elevated levels. We know there is a good historical correlation between these factors.
As with Japan, Europe will be lapping very elevated SSSg in 2H22f which could potentially result in negative SSSg.
Consensus forecasts for DMP have begun to adjust (downwards) but we see room for further disappointment as the year progresses.
We note that DMP can exercise a call option in Germany anytime after 31 December 2021 that may add to earnings.
Given the uncertainty on the trend for SSSg and store network rollout, we maintain our Sell recommendation on DMP.
