Why did the Domino's share price just hit a multi-year low?

Investors are going cold on the pizza business.

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A man looks sadly away from his computer screen as he holds a slice of pizza in his hand with an open pizza box in front of him on his desk.

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Key points

  • Investors are sending the Domino’s share price downwards again
  • It’s suffering from inflation and lower customer demand
  • But, earnings are expected to recover in the next few years

The Domino's Pizza Enterprises Ltd (ASX: DMP) share price is currently down 2%. Earlier today it went below $45, hitting a 52-week low and a multi-year low.

It has been a rough year for Domino's so far, with the company being down by over 30% in the year to date. Since September 2021, it has fallen over 70%.

During COVID-19, Domino's was able to provide some of the food that consumers wanted beyond supermarket food, while many cafes and restaurants shut in ANZ, Japan and Europe.

But, things have really changed, which we saw in the Domino's FY23 half-year result.

Earnings recap

In the first six months of FY23, networks sales fell 4% to $1.97 billion, with a same store sales decline of 0.6%. However, the number of stores increased by 15.8% to 3,736 stores.

Earnings before interest, tax, depreciation and amortisation (EBITDA) fell 14.3% to $182.3 million.

Earnings before interest and tax (EBIT) declined by 21.3% to $113.9 million.

The net profit after tax (NPAT) dropped 21.5% to $71.7 million and the earnings per share (EPS) declined 21.8% to 67.4 cents. The Domino's dividend was cut by 23.8% to 67.4 cents per share.

Lower profit can hurt the Domino's share price because how much profit a business makes is a key influence on investor thoughts.

Management blamed lower-than-expected same store sales as well as passing on inflation which hurt earnings.

Domino's said that it acted to offset rapidly increasing inflation, with price rises being a key response. The ASX share said that higher delivery pricing, including service fees and higher bundles, reduced customer demand.

Management said that customer counts have not met expectations since December, especially in Europe and Asia, which has lowered profitability.

The company said that December's EBIT was "particularly impacted" in Japan due to a large number of corporate stores, especially its 'immature' stores in regional locations.

Domino's is now evaluating its pricing strategies.

The company also noted that there were foreign exchange headwinds. If exchange rates hadn't changed, the company's NPAT may have been $5 million better, according to the company. The FY23 first half also had one less trading week than the FY22 first half.

While Domino's is looking to grow its total store count to 5,000 by 2027 and 7,250 by FY33, the business is expecting same store sales growth and new store additions to be lower than hoped in FY23.

The tricky situation

The inflation rate may have peaked, but prices aren't exactly going down. Domino's needs customers to buy food to do well, but it needs to sell those pizzas at a profit. Simply passing on the inflation to customers is hurting demand. The business needs scale to maximise the scale benefits.

There has always been a balance between profit and customer demand, but it's tough to know what to do here.

I think that the geographic expansion of Domino's can still help with longer-term earnings. Population growth could help. A normalisation of inflation could help too.

Commsec numbers suggest that by FY25, Domino's EPS could recover to $2.30. That puts the current Domino's share price at around 20 times FY25's estimated earnings, which could be quite cheap by the time FY25 arrives.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Domino's Pizza Enterprises. The Motley Fool Australia has recommended Domino's Pizza Enterprises. 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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