A slowing sales profile will cool earnings growth for the coming year at Domino’s. Costs are rising at the same time, and this led to a first half fall in operating earnings. Margins could be next.
DMP reported 1H22 network sales growth of 11.1%, but SSSg (same store sales growth) slowed to 2.8%. This led to an EBIT fall of 5.6% to $144.7 million on last year.
Our main concern with the result was the evidence of rising cost growth which increased 13% in 1H22. Marketing costs increased 17%, employee costs were up 6%, food and equipment rose 14% and ‘other’ expenses (training, consultants, travel etc) increased 26%. Including royalty expenses, these factors account for 90% of total costs.
Same store sales growth (SSSg) slowed to 3.5% in the half year and was actually negative in the December 2021 quarter. We think this weak trend will continue through to September before turning up modestly in FY23f.
Japan is the region of most concern. Store numbers and network sales are up substantially in recent years, but we expect sales per store to revert back to levels seen in FY19/20 compared to the COVID-driven peak in FY21. As this metric slows, it may influence the profitability of franchisees and therefore, the sustainability of the store rollout.
SSSg could also ease in Europe and ANZ from the heightened pandemic period.
Investment view
Our previous Sell recommendation (August 2021 $143) on DMP was predicated on slowing sales growth, particularly in Japan. We revised our recommendation to Hold in January ($101) this year after the share price had fallen 30% making it look less expensive. We maintain our Hold recommendation on the basis that elevated cost growth and weak franchisee profits could lead to fewer store openings.
The relationship between SSSg and the PE relative (to the ASX200) suggests there is excess value in the share price. The market has reluctantly adjusted near term expectations, but we remain concerned about current cost growth and the potential for margins to be hit.
Risks to investment view
DMP has indicated the possibility of acquiring more Domino’s franchises either in Europe or Asia. This would be a positive share
price catalyst.
Recommendation
We have retained our Hold recommendation.
