Customers Stick To Domino’s Pizza

This story features DOMINO'S PIZZA ENTERPRISES LIMITED. For more info SHARE ANALYSIS: DMP

Domino's Pizza has ramped up marketing in Europe as well as its digital ordering strategy, with a focus on retaining customers

-Outlines strategy to retain customers
-Marketing likely to remain elevated
-Store availability supports roll-out
 

By Eva Brocklehurst

Domino's Pizza Enterprises ((DMP)) is in line for a strong first half, providing several indications from its investor briefing that store growth and technology advances will continue apace. One thing that won't change, in the company's view, is the relentless move of customers to digital ordering and home delivery and away from restaurants and takeaway.

A data driven approach is being used to segment customers, activate sales activity and identify areas for store roll-out. Franchisees are enjoying record profitability in some geographies, including Australasia, providing the confidence to add more stores.

No trading update was provided but the growth strategy was outlined across all divisions. In Australia, Domino's Pizza assesses there is room to gain further share by attracting specific consumer segments and by online growth.

Value is now emerging for Ord Minnett, who upgrades to Buy from Hold, assessing the business can enjoy multi-year earnings growth from the expansion of stores and operating earnings margins.

The broker notes the pandemic has been an accelerant for customer acquisition and delivery, and these customers are likely to be sticky. The key growth markets are Japan and Germany with France next on the list, Australasia being the cash cow that funds the high potential.

On the technology front, predictive ordering, reduced order times, inventory and rostering apps have all provided impetus, along with a GPS tracker, improved websites and zero contact delivery.

Macquarie upgrades to Neutral as the share price is now generally in line with its target and suspects, without M&A, further multiple expansion will be difficult.

Domino's Pizza generates more than three quarters of its sales online and its networks cater for both delivery and takeaway. Delivery is expected to grow its share and, in regions where this is larger percentage of sales, the trends are better, Citi notes.

The main message the broker drew from the briefing was the strategy to retain customers, anticipating sales overall may hold up but same-store sales growth will be very low for the second half and in FY22, and this may put downward pressure on the price/earnings (PE) ratio.

German sales growth was impressive, including a 63% improvement in productivity for Hallo Pizza, a chain company acquired in 2018. Still, given the historical relationship between the PE ratio and same-store sales growth Citi is cautious and reiterates a Sell rating.

Credit Suisse notes sales growth appears to be above the medium-term range of 3-6%, while incremental costs that were present in the second half have now seemingly disappeared. Hence, profit leverage could be stronger.

While the stock screens expensive on current metrics Credit Suisse acknowledges there is no specific catalysts that could lead to a de-rating. The broker considers Europe at an inflection point, noting the conversions of Hallo Pizza have gone exceptionally well.

Marketing

Domino's Pizza has increased its marketing efforts, recently introducing TV advertising to those countries where it has achieved scale and immediately noticing a positive impact. This helped ensure double-digit sales growth in Germany while in Belgium the company has overtaken Pizza Hut in terms of the number of stores and online searches.

Citi notes marketing has been particularly elevated in the second half and will be again in FY21, which could reduce operating leverage. The main headwind envisaged is an increase in the cost of cheese in Australasia and some delay in opening stores because of the disruptions to construction/utility connections from the pandemic.

Store Growth

The company has confirmed that store availability, particularly in Europe and Japan, supports rolling out more stores and the number of franchisees remains strong with no labour shortages.

The Netherlands has set a benchmark for brand awareness in Europe and is still improving from a high base while Germany has risen sharply, as the increasing use of television advertising instigates brand awareness.

Moreover, Credit Suisse believes in regions that have experienced significant trading restrictions at restaurants there are opportunities from the sale of distress competitor stores and this could enhance site acquisition activity.

Management has signalled earnings leverage in Japan remains significant, given the weighting to corporate stores compared with the weighting to franchisees. Credit Suisse suspects, as Japan has hit the required level of advertising expenditure, scale benefits should accelerate. In Japan store openings are at more than 51 in the financial year to date.

Domino's Pizza has reiterated a store target of 2850 by 2028-33 and Macquarie calculates the long-term target provides a 2.0-2.5x uplift on the FY20 store count. Transition in France has been slower than expected as sales were affected by trading restrictions, particularly in Paris, and the store target of 500 has now been delayed by two years.

FNArena's database has one Buy (Ord Minnett), three Hold and three Sell ratings. The consensus target is $72.36, suggesting -11.8% downside to the last share price. Targets range from $58.71 (Credit Suisse) to $85.00 (Ord Minnett).

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