Domino’s Pizza Earnings: Store Expansion to Slow, but Valuation Intact

We maintain our AUD 68 per share fair value estimate for narrow-moat Domino’s Pizza DMP. We push back our medium-term store count forecast, now expecting the network to reach 5,000 stores in fiscal 2029, rather than fiscal 2028, a year later than management’s revised guidance. However, this is broadly offset by a lower near-term outlook for capital expenditures and the time value of money. The net effect of our changes is immaterial to our intrinsic assessment. Shares in Domino’s Pizza appreciated considerably on the result but still screen as undervalued.

Fiscal 2023 revenue of about AUD 2.36 billion was in line with our forecast and up a modest 3% on last year. Throughout fiscal 2023, Domino’s tried to protect franchisee margins against rampant inflation by pushing up menu prices and introducing service fees. This had a significant impact on transaction volumes and saw same-store sales growth decline 0.2% on fiscal 2022. But management has learned from this experience and is now squarely focused on rebuilding its value perception, intending no material menu price growth in fiscal 2024. We believe this will see same-store sales growth recover to 2% in fiscal 2024, underpinning 9% revenue growth to AUD 2.57 billion.

Reflecting tough trading conditions, Domino’s adjusted EBIT fell 23% on last year to AUD 202 million. This saw the EBIT margin, as a percentage of network sales, slide to 5% from 7% in fiscal 2022. However, we expect EBIT margins to improve to around 7% in fiscal 2024, reflecting savings from Domino’s restructure, which, in isolation, should add around AUD 35 million of EBIT, and disinflation of key ingredients. Domino’s is also increasingly diversifying away from products targeting dinner and shared meals, and into higher-margin categories like single-occasion and snacking—the new My Domino’s Box is a prime example—which should help margins.