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Will Domino’s Pizza Suffer Lockdown Hangover?

Australia | Nov 05 2021


Will Domino's Pizza be one of those food services that suffers a hangover after enjoying a surge in demand during a year of widespread restrictions on eating out?

-Labour constraints could mean a difficult year ahead in terms of expanding the network
-Cost pressures appear to be building, with food inflation materialising earlier than anticipated
-Weakness in Japan could continue over the Christmas trading period


By Eva Brocklehurst

Takeaway pizza and home delivery have been hugely popular across the globe as lockdowns were endured, yet Domino's Pizza Enterprises ((DMP)) has sustained a uneven performance over the September quarter and customer behaviours appear to be in a state of flux.

Inflation pressures are mounting and there was no new commentary on acquisitions at the company's AGM. Same-store sales rose 4.3% and network sales increased 8.0% the first 18 weeks of FY22, accelerating from the first seven weeks.

Food inflation is now expected to materialise in the second half, which Citi observes is ahead of prior expectations for the first half of FY23. This is also consistent with the recent results reported by brand owner Domino's Pizza Inc in the US.

Inflation poses a risk to margins over the short term but the broker asserts those operators with smaller scale will sustain a greater impact and, therefore, this will allow operators such as Domino's Pizza to take share.

UBS considers labour to be the major stumbling block for the quick service restaurant industry, although notes Domino's is confident its franchise can attract staff. The company has indicated FY22 will be a record year for expanding the network, forecasting 365 new stores in FY22 or as Macquarie comments: one for each day of the year.


In Japan, as restaurants and bars re-opened the company's network sales have been negative, although on a 2-year basis there was growth. Still, Macquarie notes uncertainty prevails about whether FY22 sales in Japan will surpass FY21.

The main issue, therefore, is whether Domino's benefited more so from lockdowns in Japan than previously anticipated, and Credit Suisse asserts the reversion of sales in Japan shows the difficulty of forecasting what is normal going forward.

Goldman Sachs found the update largely negative, homing in on weak trading in Japan and noting management has observes significant changes in behaviour since the end of a state of emergency in Japan.

This implies a higher-than-expected benefit from pandemic restrictions in Japan and if this continues into Christmas, the broker considers the outlook will remain weak over the next 12 months as the region cycles lockdowns. Goldman Sachs downgrades its estimates for the region by -13.4% to reflect this risk.

Citi also expects the current negative momentum may impact the Christmas trading period and forecasts first half same-store sales to decline by -1% in Japan.

What will be key, Jarden believes, is the company's ability to use its data capability to re-engage, and the outcome of this will not be known until the second half. The broker reduces overall revenue forecasts by -5% to reflect the impact of the contraction in Japan, the skew to the second half for store openings and the FX headwind.


In Europe it was another story, as management observed new customers were retained even as social restrictions eased. The roll-out of stores in Europe is on track, albeit weighted towards the second half.

Yet Credit Suisse is not sure that labour availability will not become a greater constraint in Europe. Higher food and energy costs could also have a negative impact on profitability.

Meanwhile, lockdowns in Australasia affected the ability of workers to commute and resulted in changes to delivery. Citi suspects Australasia was also weak over the first quarter, particularly New Zealand.

New Zealand contributes a higher proportion of group earnings compared with its store numbers because of the low overheads, with support services derived from Australia.

Nevertheless, the broker does expect New Zealand will improve after lockdowns are lifted. The company's Project Ignite will entail expenditure of $10-12m which Macquarie notes will lower earnings in the first half albeit lift store numbers over FY22 and beyond.

Jarden believes Europe and Australasia are performing well, and in Europe there is a benefit from re-opening as "carry-out" returns. In Australasia there is also a benefit from the labour challenges being experienced by aggregators.

Among those stockbrokers not monitored daily on the FNArena database, Goldman Sachs maintains expectations for longer-term growth and reiterates a Buy rating with a $147 target while Jarden, although assessing the valuation is full, retains an Overweight rating and $113 target.

The database has four Hold ratings and one Sell (Credit Suisse). The consensus target is $130.08, suggesting 4.2% upside to the last share price. Targets range from $77.73 (Credit Suisse) to $150.00 (UBS).

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