Domino's Pizza: Clearly tracking well across the board
About the author:
- 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
- DMP is confident it can keep new customers arising from COVID;
- Opex leverage is highly likely from continued strong sales and “shareholders will be happy
with margins, especially in Japan/Germany”;
- Germany could become DMP’s largest
market in time;
- Franchisee profitability is up nicely yoy (materially in some markets eg
- Franchisee support seen in 2H (largely in NZ, France, CBD areas)
has all but ceased; and
- 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
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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