The Domino's Pizza Enterprises Ltd (ASX: DMP) share price is having a difficult time on Tuesday.
In afternoon trade, the pizza chain operator's shares are down 5.5% to $47.07.
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Why is the Domino's share price taking a tumble?
There are a couple of reasons for the weakness in the Domino's share price today.
The first is the release of the latest quarterly update from parent company Domino's Pizza Inc (NYSE: DPZ) on Wall Street overnight.
As a master franchisor, ASX-listed Domino's contributes to Domino's Pizza Inc's international segment. This provides investors with a bit of a read-through for how our own Domino's could be trading.
According to the release, Domino's Pizza Inc's international segment reported same-store sales growth of 3.6% over the prior corresponding period. Though it is worth highlighting that same-store sales were down 2.2% in the prior corresponding period, so it wasn't the toughest quarter to compare against.
Investors may believe this is a sign that ASX-listed Domino's isn't quite back in the groove just yet.
What else?
Also likely to be weighing on the Domino's share price on Tuesday is a broker note out of Goldman Sachs this morning.
According to the note, the broker has downgraded the company's shares to a sell rating with a $41.10 price target.
One of the reasons that Goldman is bearish on Domino's is that franchise profitability remains challenged and competition is rising from other fast food chains. It explains:
In FY23 we estimate local currency commodity inflation between ~15-20% with only average low single digits of ASP improvement. As such, we calculate that most DMP franchisee's payback periods are still above the targeted average ~3yrs across the group. Per our calculations, we estimate that Japan payback periods are still between 6-7 years and whilst Europe and AU virgin stores are closer to 4yrs, any regions with split stores will be closer to 5yrs.
Additionally, market competition for quality franchisees are increasing. In Australia alone, QSR chains [are] receiving funding from private equity. For DMP's key competitor Pizza Hut, the recent acquisition from Flynn Group is likely to target continued market expansion and McDonalds' has recently announced a ~A$1B expansion plan with A$650mn targeted for an additional 100 new stores. In our model, we have ANZ increase ~90 stores for DMP over the next 3 years to ~1,000 by FY26e, though the risk of this is increasingly higher with quality competition fighting for franchisees.
