Domino’s Pizza has enjoyed multi-year growth due to store expansion, assisted by improved franchisee profitability, driving strong network sales growth with operating leverage as well as reduced franchisee support and improving corporate stores enabling margin expansion.
COVID-19 has been an accelerant for delivery customer acquisition, with these customers expected to remain with Domino’s, while takeaway customers should return in greater numbers as the impact from COVID-19 moderates.
The company recently held an Asia investor day where it reiterated the strategy outlined in 2019, with a key focus on higher store density to drive lower delivery costs. Targets for net store growth of 9–12% per annum are well on track, with the company’s main competitors in the region largely keeping stores constant. We see further acquisitions as likely, with inorganic growth representing a fast way to accelerate the store network.
Sales have settled at higher than pre-COVID-19 levels, but below COVID peaks. The frequency of ordering has stabilised, and the barbell strategy and supply chain changes implemented before COVID have put the business in a good position relative to its quick-service restaurant peers in Japan. Taiwan margins are similar to Japan’s, but at a much lower level of sales per store.
Inflationary pressure is significant from a cost of goods sold, energy and, to a lesser extent, wages perspective. Domino’s has kept prices lower than peers as it tries to offset with efficiencies that stem from greater store density.
Advertising as a percentage of network sales is considerably higher in Japan, at 12% of sales, down from 13% on acquisition but double the rate in most other Domino’s markets. Management does not expect this to fall to Australian levels (6–7% of sales), although as scale builds towards its 2,000-store target over the next 10 years, this could fall by several percentage points, driving margin expansion as a proportion of network sales.
No trading update was provided and our earnings forecasts remain unchanged. Given a rerating of the stock, however, we recently upgraded our recommendation to Buy from Accumulate with an unchanged $99.00 target price.
RESEARCH EDITOR
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.
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DMP, Domino's Pizza
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