Domino's Pizza: Delivering to plan

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
11 November 2020, 9:10 AM
Sectors Covered:
Consumer Discretionary (Retail)

  • DMP’s trading update revealed a slight slow down (albeit still very strong) SSS growth over the last 10 weeks (+6.6% vs +10% for the first seven weeks), with SSS growth still trading above DMP’s +3-6% target range.
  • 74 new store openings YTD was materially up on the same period of last year, although to some degree reflects some slippage from FY20 given COVID-19 disruptions. That said, we see upside to our rollout forecast in FY21.
  • DMP is well-placed to continue to grow via store rollout, SSS growth and margin efficiencies. However, with the group trading on 44x FY21F PE (vs parent DPZ on ~31x), we maintain a HOLD rating with an unchanged price target (login to view price target). Accretive acquisitions remain a key area of earnings/valuation upside.

AGM trading update – SSS growth still tracking well

DMP provided its usual AGM trading update (17 weeks), comprising: Group network sales +14.9%; Group same store sales +8.4%; and online sales +20%. Given SSS growth for the first 7 weeks was +11%, this implies the last 10 weeks have traded at +6.6% - a deceleration to more normalised levels, but still above the top-end of DMP’s +3-6% target range.

As expected, no regional SSS commentary was provided although management did call out Germany and Japan as regions of strength. No margin commentary was provided and therefore we don’t expect any major franchisee support has been provided.

New stores +74 year to date; long-term target reiterated

74 store stores have been opened YTD (vs 42 the pcp), comprising: Japan +38; Europe +30 (France +12; Germany +9; Netherlands +4; and Belgium +5); and ANZ +6. At its FY20 result, DMP flagged that it expected some FY20 store openings to slip into 1H21 given COVID-19 disruptions and we expect that this has bolstered YTD openings to some degree.

DMP continues to expect to open a record number of new stores in FY21, while the group also reiterated its long-term store target to 5,500 stores by FY28-33 (vs 2,740 currently). We see risk to the upper end of DMP’s store rollout growth target in FY21.

Medium-term targets maintained; we forecast ~15% EBIT growth

DMP reiterated its 3-year SSS and rollout targets, comprising group SSS +3-6%; footprint growth of +7-9% pa; and annual net capex target of A$60-100m. We forecast EBIT growth of 14.5%/13.3% in FY21/FY22.

Key assumptions to our FY21 forecasts include: SSS growth of c6.5% (ANZ +6%; Europe +6%; Japan +7%); 7% footprint growth (primarily Japan/Europe); and a rebound in EBITDA/NWS margins following the impact of COVID-19 on its Europe/ANZ operations.

Our forecasts remain unchanged following DMP’s update.

Hold maintained 

DMP continues to benefit from conducive trading conditions resulting from COVID-19. As the dramatic shift to delivery plays to DMP’s greatest strength, this drives a greater belief in the store rollout and therefore the Group’s long-term prospects. DMP remains very well placed during COVID-19 and in its wake, however the stock has materially re-rated in recent months and is now trading on 44x FY21F PE (vs parent DPZ on 31x NTM PE).

We maintain a HOLD rating. Key risks: COVID-19, increased competitor activity, inability to secure store locations, increasing commodity costs, and franchisee support requirement.

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