The share price of Domino’s Pizza Enterprises Ltd. (ASX: DMP) has dropped almost 50% from its all-time high six months ago. Does this make it an opportunity?
Domino’s share price goes cold
Domino’s was one of the businesses that experienced a boom of demand during COVID-19 times.
However, that boom is fading as more people find different places to get their food from.
The FY22 half-year result was not exactly a sizzling success. Network sales may have grown by 11.1% to $2.05 billion, but the EBIT (EBIT explained) fell by 5.7% to $144.7 million. Underlying net profit after tax (NPAT) declined by 5.3% to $91.3 million.
Domino’s explained that its EBIT declined 6.1% to $60.3 million in Australia after investing in its franchisees. Japanese EBIT fell 17.3% reflecting a ‘rebasing’ of Japan sales and accelerated corporate store openings, which compressed margins. However, European EBIT grew 11.5% to $49.7 million.
Despite the disappointment of Japanese earnings, Asia was a highlight with the acquisition of the Taiwan business, which added 156 stores.
Management is still expecting long-term growth
The company continued to experience growth in the first few weeks of the second half of FY22, network sales were 6% higher, and 1.7% higher on a same-store sales basis. It had added 23 new stores.
Domino’s opened its 3000th store in the first half of FY22. The 4000th store is planned for the 2023 calendar year and the 5000th store is planned for the 2026 or 2027 calendar year. In FY33, it expects to have around 6,650 stores, with over 3,000 European stores, more than 1,200 ANZ stores and about 2,400 Asian stores.
Acquisitions and geographic expansion into new areas can help the Domino’s share price grow in the long-term.
Over the next three to five years, the company is expecting annual same-store sales growth to be in the range of 3% to 6%.
It’s going to invest in its future, with the outlook for the net capital expenditure being between $100 million to $150 million, as it assists franchisees with store expansion and invests in future digital technologies and initiatives.
If the company can combine strong store network growth with same-store sales growth, it should be on track for a solid long-term future.
Is the Domino’s share price an opportunity?
Domino’s is expecting a lot of revenue growth over the next decade.
For me, there are two main difficulties with Domino’s. How long will it be able to keep generating same-store sales growth? What is the right earnings multiple for a food and delivery business?
At the moment, CommSec’s earnings forecast puts the Domino’s share price at 32 times the estimated earnings for the 2023 financial year and 27 times the estimated earnings for the 2024 financial year. That’s not exactly ‘cheap’. The ASX share will need to return to good growth in FY23 to justify the current valuation.
I think Domino’s has a promising future, but there are other ASX growth shares I have more conviction in.
