The unwinding of super-sized pizza sales from COVID-19 days continues for Domino’s Pizza Enterprises.
DMP reported FY22 EBIT of $263 million, down 10% on last year. Same store sale growth of -0.3% was weaker in 2H22 at -3.4%. The first seven weeks of FY23f were only -1.1% SSSg and we expect modest growth in FY23f but likely below the group target range of 3-6%. The three year CAGR fell slightly to 4.1% in the latest trading update, and this is a better indication of the trend given the volatility of the last few years.
EBIT margins varied by geography with Europe noticeably weak in 2H22 at -186bp and Asian margins fell 317bp in FY22. ANZ margins were up 105bp in 2H22. Cost reduction will take some pressure off margins in FY23f. A key factor will be if price rises can stick in Australia and are successfully implemented in Europe.
The result commentary included the announcement that DMP has entered three new markets in Asia – Malaysia, Singapore and Cambodia. DMP has acquired the second largest pizza chain in each market with 287 corporate stores for ~A$214 million (potential A$142 million earnout). DMP sees the long term store potential as 600+ across all three markets. The acquisition is to be funded from cash and debt and raises group leverage to 2.2x from 1.7x at 30 June 2022.
We point out that the Germany put option exercise is lurking meaning DMP could outlay $344 million by early 2023 pushing leverage to around 2.4x.
DMP’s product innovation is approaching a jump-the-shark moment, in our view. The launch of the burger pizza may not qualify but must surely come close to this ignominious title. Perhaps Macdonald’s will respond with a pizza burger? DMP describes this as ‘democratising high quality food’ but maybe we have missed something in translation.
Investment view
The addition of the three new Asian markets broadens DMP’s reach but introduces some extra risk. We note that Cambodia is just 8 stores, and the 38-store Singapore market is exposed to a very high income per capita country. Malaysia could be the driving force given its larger population of the three.
DMP experienced unusually large sales growth due to the pandemic and the inevitable sales slide has commenced. We think it has some way to go yet and depends on the individual market, but group level sales will be soft in FY23f. We are especially watchful of Europe.
At a PE ratio of 33x FY23f consensus EPS, we think DMP is still more Super Supreme than Margherita.
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.
FIGURE 1: SAME STORE SALES GROWTH
FIGURE 2: SAME STORE SALES GROWTH
FIGURE 3: FY22 RESULT
