The Domino's Pizza Enterprises Ltd (ASX: DMP) share price has started the week in a subdued fashion.
In afternoon trade, the pizza chain operator's shares are down almost 2% to $69.90.
Why is the Domino's share price falling on Monday?
The weakness in the Domino's share price today appears to have been driven by the release of a broker note out of Goldman Sachs.
In response to the quarterly update from the company's US parent, the broker has reaffirmed its out of consensus sell rating and $59.20 price target on its shares.
Based on the current Domino's share price, this implies potential downside of over 15% for investors over the next 12 months.
What did the broker say?
Goldman notes that the Domino's US business handed in a mixed quarterly update at the end of last week. The broker commented:
DPZ.US, the global master franchisor to DMP reported its CY2Q22 results overnight, in-line with GSe with better US SSS though weaker unit growth, while International SSS disappointed. DPZ.US revised its CY22 guidance on food basket pricing YoY chg from 10-12% (1Q22) to 13-15% (2Q22).
The broker believes that this update is supportive of its bearish thesis on the locally listed Domino's and continues to forecast earnings well short of the market's expectations. It concluded:
We reiterate our out-of-consensus Sell. As a reminder, our thesis is primarily based on: 1) weaker-than-expected store roll-outs given challenged franchisee payback periods; 2) COGS inflation that cannot be fully passed through impacting margins; and 3) FX translation on JPY and EUR depreciation as well as transaction risk for JPY as Japan imports a material portion of COGS in USD. With this, our FY23E / FY24E sales and NPAT are ~4%/5.5% and ~19%/27% below FactSet consensus.
