Domino's Pizza: Clearly tracking well across the board

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
01 December 2020, 4:30 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

  • Domino's Pizza Enterprises (ASX:DMP) investor briefing showed incrementally positive tone across the board.
  • Key new points of interest: Japan/Germany are still firing and Germany could become the largest territory for the group in time; opex leverage/margin expansion should please investors; franchisee support has ceased (already known); and franchise unit economics are strong (up double-digits in some areas).
  • When a large franchise has strong momentum and franchisee profitability is strong this leads to an increased appetite for new stores…DMP’s largest growth driver.
  • We lift our EPS forecasts by 2% and forecast a 3-year EPS CAGR of 15%.
  • Following the recent share price de-rating and positive momentum across the group, we upgrade to an Add rating with a new PT (login to view).

Investor briefing highlights

DMP’s investor briefing showcased its management depth across its various regions and highlighted how it will hold onto customers it ‘won’ during COVID. For us, there were a few key takeaways:

  1. DMP is confident it can keep new customers arising from COVID;
  2. Opex leverage is highly likely from continued strong sales and “shareholders will be happy with margins, especially in Japan/Germany”;
  3. Germany could become DMP’s largest market in time;
  4. Franchisee profitability is up nicely yoy (materially in some markets eg Japan/Germany);
  5. Franchisee support seen in 2H (largely in NZ, France, CBD areas) has all but ceased; and
  6. DMP has access to enormous amounts of data via its app which is being used to segment customers, activate sales and assist store growth identification.

Japan and Germany clearly pumping

It was clear to us from the briefing that Japan and Germany are exhibiting strong top-line growth and margin expansion. Of particular interest were comments around Germany likely to be DMP’s strongest growth market for periods yet and could ultimately become DMP’s largest market.

Germany is currently producing close to the highest sales/store/week across DMP’s markets. Previously branded Hallo Pizza stores have shown a 63% uplift in sales. Increased branded awareness and an ability to increase mass market advertising has likely assisted this territory.

Japan has been strong for a number of periods and we heard nothing throughout the presentation to suggest this hasn’t continued. Not much mention at all was made of France and Bennelux.

Scale = mass market advertising = brand awareness/sales

DMP went to great lengths to explain how most markets now have scale commensurate with national TV advertising. While this could crimp margins somewhat, the ability to advertise nationally could provide a further step-change in sales productivity, especially in markets like Germany.

This advertising, in addition to customer data, a value offering and increased utilisation are helping DMP retain customers.

Upgrade to Add post de-rate and solid momentum

When asked about headwinds across the business, the group struggled to name many. Some soft commodity pressure in A/NZ will flow in the 2H, the threat of increased COVIDrelated lockdowns and maintaining the store rollout cadence were the few things mentioned.

Overall, we think the tone of the briefing was incrementally positive and expect there is upside risk to our forecasts, with margins providing the key swing factor, in our view. Post the share price de-rating and strong momentum across the group currently, we upgrade to Add with +10% TSR on offer vs our (login to view price target). While DMP’s PE multiple remains elevated (34x NTM), the EPS growth CAGR is attractive.

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