Why is the Domino’s share price struggling on Monday?

What’s going on with the Domino’s share price today?

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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.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Dominos Pizza Enterprises Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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