Domino's Pizza: AGM update - 1Q23 was challenging but same store sales growth turned positive in October

Author name:: By Alexander Mees
Job title:: Co-Head of Research and Senior Analyst
Date posted:: 03 November 2022, 7:30 AM
Sectors Covered:: Gaming and Retail

Inflationary pressures and adverse FX combined to create a ‘challenging’ environment for operating margins in 1Q23. DMP has said it expects to deliver NPAT growth in the full year FY23 on a constant currency basis, though 1H23 earnings will be ‘materially’ lower than 1H22.
Same store sales growth was (1.0)% YTD, in line with the previous guidance for a negative performance in 1Q23. We were encouraged to see same store sales growth turn positive in October as DMP started to cycle flat to negative comps in the prior comparative period. We believe this could mark a point of inflexion for sales growth, which is likely to accelerate as the year goes on.
We have lowered our FY23 NPAT estimate by 7% to reflect DMP’s guidance today. We now forecast NPAT of $165m after accounting for ~$7m FX impact. FY22 NPAT was also $165m. Our rating remains ADD and our target price remains (login to view).

Event

We update our estimates after guidance provided at the AGM.

Analysis

Sales expected to recover in line with previous guidance. As expected, 1Q23 was a challenging period for DMP as it cycled strong comps, while running into macro-economic headwinds and inflationary pressures across all markets.

YTD same store sales (SSS) growth was (1.0)%, in line with the (1.1)% reported back in August for the first 7 weeks of the year. SSS growth in October, however, was +1.6%, including +7.6% in Asia and +3.0% in Europe.

We were looking for a sales inflexion in October and this is exactly what we got. ANZ has achieved SSS growth within the 3-6% range in FY23 YTD, which we see as a good performance. DMP reiterated its previous guidance that it expected FY23 SSS growth at the group level to be within the range +3-6%.

Our forecast remains at the lowest point of this range, +3.0%. Network sales growth in constant currency in FY23 YTD was +4.7% and DMP has added 41 stores so far.

Cost pressures are intense in the near-term, but they will pass. DMP indicated that earnings took a big hit from inflationary pressures and FX in 1Q23. This will drag on first half earnings, which DMP expects to be ‘materially’ lower than 1H22, despite what is likely to be a positive impact from the FIFA World Cup in Europe and anticipated strong Christmas trading in Japan.

We forecast first half NPAT to be 15% lower y/y ($77m). 2H23 will see less challenging comps, as well as the benefits of ‘significant pricing changes’ throughout the network. There may also be a positive impact on margins from a moderation of input cost pressures, but we do not assume this will be the case at this stage.

We forecast 19% y/y growth in NPAT in 2H23 ($88m). DMP says it currently anticipates FY23 NPAT to ‘exceed FY22 NPAT excluding ~$7m FX headwinds’.

Forecast and valuation update

We have lowered our FY23 NPAT estimate by 7% to $165m to take account of the cost pressures experienced in 1Q23 and current expectations for the balance of the year. We have lifted our organic store rollout estimate for FY23 slightly and now forecast it will represent 8.0% of the opening store count (previous forecast: 7.5%).

Our target price, which is a blend of our DCF and EV/EBITDA-based valuations, remains (login to view).

Investment view

DMP is, in our opinion, a high quality operator with significant brand strength, first class executive management and a global platform for long-term network expansion.

Cost inflation and adverse FX movements present significant challenges to earnings at present, as evidenced by EBIT margins, which fell from 13.4% in FY21 to 11.5% in FY22. SSS sales, which averaged +6.9% in the ten years between FY11 and FY21 dropped to (0.3)% in FY22 and (1.0)% in FY23 YTD.

We believe these pressures are transitory in nature. In our opinion, now is the best time to consider an investment in a quality business like DMP that is facing headwinds that will reverse in time.

Risks

Further adverse FX changes or renewed cost inflation would hit our estimates.

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