The Domino’s Pizza Enterprises Ltd. (ASX: DMP) share price has fallen over 20% over the last two months. Could that mean that the food business is now an opportunity for investors to consider?
What happened to the Domino’s share price?
On 3 November 2021, the business released a trading update at its annual general meeting (AGM) as the market was closing. The day after, the Domino’s share price dropped 18%.
In that trading update, the business said that its network sales in the year to date were 8% higher, or 4.3% higher on a same store sales basis. Domino’s said it has delivered positive sales momentum despite significant societal changes as each market continues to respond to COVID-19.
Management noted that the growth compounds the 14.9% sales growth in the prior year. It highlighted that it achieved strong growth during difficult and uncertain times.
Domino’s acknowledged that while the growth in FY22 represented an improvement compared to the full year trading update, sales growth has been uneven across regions, with operations affected by local conditions.
Also, due to a strengthening of the Australian dollar against offshore earnings, the translation of those earnings back into Australian dollars is a headwind.
Profit expectations can change investor thoughts about the Domino’s share price.
In Australia and New Zealand, Domino’s said that lockdowns in Victoria, NSW and Auckland caused some difficulties. The company is working on increasing its store openings with a $10 million to $12 million investment – this will lower earnings in the first half, but it’s expected to lift store openings this year and over the medium-term.
In Asia, Domino’s is integrating the Taiwan acquisition.
Japan recorded “excellent” compounding sales in the first quarter of FY22, before the government lifted its national state of emergency at the end of September. However, with restaurants, bars and shopping centres now open, network sales are down year on year, but up on a two-tear basis.
Management aren’t sure if Japan sales in FY22 will surpass the sales total in FY21.
However, Domino’s said new store openings will continue to be “very strong”. But, management did say that as a result of structural changes in marketing, pricing and store penetration, current sales and customer counts remain materially higher than the corresponding period before COVID.
Domino’s said that initial indications are positive that newly acquired delivery customers are largely being retained as society restrictions ease, in line with Dominos’s expectations. Efforts to bring back carry-out sales are ongoing.
An outlook can play into investor’s calculations on the value of the Domino’s share price.
The company noted it’s expecting inflationary headwinds including higher energy prices, as well as rising global food costs, though long-term contracts will provide some buffer. It’s expecting better efficiencies at a store level, with growing unit sales to offset short-term inflation.
It’s aiming to open a record number of stores in FY22. Domino’s is also looking at additional markets.
The company’s longer-term outlook remains unchanged: same store sales growth of between 3% to 6% and 9% to 12% new store openings.
Analyst thoughts on the Domino’s share price and update
There are a number of brokers that currently rate Domino’s as a hold/neutral. But within those ratings, there are a range of price targets.
For example, Morgans has a price target of $135 – that suggests a potential upside of around 10% over the next 12 months.
But UBS is more confident about Domino’s prospects in the shorter-term and the longer-term about its targets, with a price target of $150. That means an implied rise of the Domino’s share price of around 20%, if the broker is right.