Domino's Pizza: FY22 Earnings - It gets better from here

About the author:

Author name:

By Alexander Mees

Job title:

Co-Head of Research and Senior Analyst

Date posted:

25 August 2022, 7:30 AM

Sectors Covered:

Gaming and Retail

• The transition out of COVID-19 tailwinds and into an environment of inflationary pressure and reduced consumer confidence made FY22 a challenging year for Domino's Pizza (ASX:DMP). EBIT fell by 10.5% as both Asia and Europe reported reduced margins and same store sales growth. We believe it will get better from here. We forecast 12.9% EBIT growth in FY23, followed by 19.5% growth in FY24.
• Higher prices, operating efficiencies and menu enhancements are already allowing DMP to offset cost inflation in ANZ and Asia. It’s been slower in Europe, but it appears progress is being made. With the prospect of some relief in commodity price inflation and reduced losses in Denmark, we expect margins to rise in FY23.
• We have lowered our forecast EBITDA for FY23 and FY24 by 4% and 3% respectively. We retain an ADD rating. Our target price is (login to view).

Event

FY22 earnings.

Analysis

EBIT was 7% below forecast, but we think it gets better from here. FY22 EBIT was $263m, down 10.5% y/y, 6.9% lower than our estimate and 4.9% lower than consensus. Both ANZ and Asia delivered earnings in line with expectations.

The difference was in Europe, where margins came under pressure as DMP wrestled with various strategies to pass on cost inflation and as it absorbed losses in Denmark and increased royalties in Germany.

Sales trajectory will accelerate as FY23 goes on. Same store sales (SSS) fell by (0.3)% in FY22, which was below our forecast of +0.7%. SSS were down (2.4)% in Asia and (1.3)% in Europe, but up +1.3% in ANZ.

The first seven weeks of FY23 saw (1.1)% SSS decline. The first quarter of FY23 will continue to be challenging as Japan cycles the last two months of the State of Emergency and Europe cycles the UEFA European Cup.

But, from October, the comps get easier and we expect SSS growth to turn positive. DMP itself expects to deliver FY23 SSS growth in the range 3-6%. We forecast 3.7%, with all regions back in the black.

Higher prices are ‘working through the system’. Since the start of CY22, DMP has seen ‘significant increases’ in energy, labour and food costs throughout its business. DMP has attempted to mitigate inflation through price increases and menu enhancements.

Customers in APAC have ‘accepted the need for higher prices’, but bringing European customers to the same place has been a challenge and remains work-in-progress.

We believe the outlook is becoming slowly more positive for margins as certain commodity prices (wheat and cheese in particular) come off their highs and as price increases and operating efficiencies take effect.

Asian acquisition adds to long-term growth opportunity. DMP will acquire the Domino’s franchises in Malaysia, Singapore and Cambodia for an initial price of A$214m. This represents 11x trailing EBITDA (pre-IFRS16). There is an earnout of up to A$142m over the next 2-3 years.

In each market, Domino’s is the second largest pizza chain. The acquisition adds to DMP’s existing presence in Asia (Japan and Taiwan). ‘Significant’ synergies are expected to be achieved as DMP integrates the new markets into its existing infrastructure.

DMP sees an opportunity to grow to more than 600 stores in these markets.

Forecast and valuation update

Lower sales forecasts sees us reduce our EBITDA estimates by 4% to $437m in FY23 and 3% to 504m in FY24. Our new forecasts imply EBITDA growth of 10% in FY23 and 15% in FY24.

Our target price falls from (login to view) due to the changes in our estimates.

Investment view

Demand for DMP’s product is likely to remain resilient in times of inflation and slower economic growth. Takeaway food has been one of the most resilient categories of consumer spending during periods of rising inflation.

The engine of DMP’s growth is the rollout of new stores. The medium-term opportunity is undiminished.

Risks

Failure to mitigate cost inflation, especially around food, energy and labour. Further unfavourable movements in FX.

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