Australia | May 24 2019
Domino's Pizza appears comfortable with the progress being made, as it continues to roll out stores in Europe, maintaining earnings guidance for FY19.
-Australasian margins expected to remain under pressure
-Aims for 10-15 stores in Denmark within 6 months
-August 21 results expected to test forecasts, given recent misses
By Eva Brocklehurst
Domino's Pizza Enterprises ((DMP)) has sounded the 'all's well' siren, reiterating FY19 earnings (EBIT) guidance. Citi, forecasting $225m, prefers to be slightly below guidance, slated by the company at the lower end of the $227-247m range. A lot is factored in to FY20 based on rolling out new stores which, the broker highlights, have recently been below target.
The next catalyst is the results on August 21, which brokers expect will test the company's ability to meet guidance, given four consecutive half-year periods when guidance was missed. However, the fact there was no revelations about trading to cast doubts on forecasts alleviates most of this risk, UBS asserts.
Deutsche Bank finds nothing materially new in the update and continues to envisage downside risk to FY19 guidance, expecting Australasia and Europe to remain soft and this to be only somewhat offset by better results from Japan. Australasian margins are expected to remain under pressure as a large share of the profit pool is taken by the franchisor.
CLSA continues to like the business for its strong innovation and significant long-term growth forecasts. The broker, not one of the eight monitored daily on the FNArena database, assesses the stock is “superb” value, maintaining a Buy rating and $55 target.
While the absence of an actual trading update for FY19 could be construed as good news, UBS points out June is a key trading period in Europe. Domino's Pizza aims for 10-15 stores in Denmark within six months and, while this is a small market, existing overheads in Europe are expected to provide leverage to drive profitability.
Management expects Europe to accelerate in FY20 and has signalled progress in overcoming historical franchisee reluctance in relation to store expansion in France. Still, Credit Suisse suspects the European expansion debate will likely continue amongst investors until a consistent growth path is achieved.
Citi expects sales trends in Europe to remain sluggish and margin expansion to be modest. The company's performance in France remains difficult, the broker notes, and tactics have reverted to the Mardis Fous (Crazy Tuesday) promotion. Online order aggregators will be used in France, which Citi considers practical and essentially a lower-cost customer acquisition. On this point, however, UBS notes the roll-out of has been delayed.
Meanwhile, Germany is on track and all store conversions from Hallo Pizza have been completed. Credit Suisse was a little surprised that Germany would move to organic store openings, as suggested by management's commentary, given Hallo Pizza has just recently converted to the Domino's Pizza brand. The broker suggests investors could look to FY20 as a test of the company's European strategy.
Citi also doubts the Pizza Checker in Australia will have a big impact on customers, although it may improve product credibility. Meanwhile, a number of poor performing franchises in Australasia have moved to corporate stores so the second half of FY19 is shaping up as a transition period. The company is signalling there is no significant profit impact in the second half as a result of the transition.
There has been positive feedback, meanwhile, in Japan regarding new lower-price choices and more marketing expenditure is expected in this regard. The debate in Japan centres on the success of the "barbell strategy", specifically lifting the volume of value sales and adding higher value to the menu. Credit Suisse believes the company needs to do this in order to have an impact on franchise economics in that country.
FNArena's database shows two Buy ratings, three Hold and three Sell. The consensus target is $44.40, signalling 12.4% upside to the last share price. Targets range from $35.00 (Deutsche Bank) to $51.40 (Macquarie, yet to comment on the update).
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