Domino’s Pizza Enterprises has always planned for the long term but is facing a difficult couple of years as costs rise and the store rollout program might slip.
Sales growth in FY23f will be below DMP’s target 3-6% range, in our view. DMP’s recent company update in Japan exposed the ‘rebasing’ of sales after the COVID driven peak in FY21. Across Asia (Japan and Taiwan), we expect SSSg (same store sales growth) to fall throughout 2H22f and 1H23f. This is mainly reflecting the normalisation of sales after the outsized growth during the pandemic. Germany could also see weaker volumes as COVID-19 impacts ease, but sales in Europe generally could benefit from higher inflation. In Australia/NZ, takeaway food sales have fallen in the four months to April, so we are expecting soft SSSg in this region in 2H22f.
Cost pressures are rising, particularly in Europe. The cost of goods sold, wages and utilities are rising significantly. In aggregate, these factors account for about 70% of total costs for company stores and 64-68% for a typical franchisee (see Figures 3 and 4). DMP is more inclined towards driving market share which may squeeze near term EBIT margins. In 1H22, cost growth exceeded sales growth and we may see this trend persist for the next 18 months.
The price of mozzarella cheese has risen over 30% in the last year. Cardboard is up almost 20% while wheat and ham prices are also rising. DMP probably has some forward purchasing and hedging in place, but these arrangements would likely only be in place for around 6 months.
Wages growth is picking up in most of DMP’s markets and may eventually become more significant. Delivery staff are crucial in reducing delivery times for greater customer satisfaction.
The company’s store rollout target is ambitious. The medium term store rollout plan is to add 9-12% of the network each year over 3-5 years. By increasing store density, particularly in Taiwan and Japan,
DMP can improve customer delivery times and marketing effectiveness. In Europe, the ability to secure sufficient franchisees will make it challenging to meet the 2033 store target. Sales productivity is already high in Australia/NZ and yet franchisee payback on new stores is longer than 3 years. This may limit the number of new store openings in this region.
Investment view
DMP prefers store rollouts and market share growth, but with cost pressures rising, this could impact EBIT margins in FY22-23f. Paradoxically, this may eventually take a toll on the store rollout targets for each region.
The share price has fallen from above $150 last year and while consensus forecasts have adjusted to a slower sales outlook, we do not think it has gone far enough. A combination of slower sales growth, lower EBIT margins, adverse foreign exchange rates and a slower store rollout suggests fair value for DMP is a PE ratio of 29x FY22f eps. While the stock price is not too far away from this level, we think investors can still wait for a cheaper entry point.
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.
