The Domino's Pizza Enterprises Ltd (ASX: DMP) share price has fallen 25% this year and it's down 70% from the peak in 2021, as we can see on the chart below. In this article, I'm going to look at whether the fast food business is a great opportunity in the S&P/ASX 100 Index (ASX: XTO) or not.
While causing difficulties, the COVID-19-affected financial years saw strong earnings growth as consumers looked to Domino's (and others) to provide food that wasn't home-cooked.
But a number of things have now changed – all the restaurants and cafes are now open, inflation of costs is impacting demand/profitability, and higher interest rates may have impacted the valuation as well.
What are the latest trading conditions?
The company said in mid-June that it has taken steps to deliver "material, near-term, cost savings, improving efficiency and building a stronger foundation for future growth."
One of the moves it's doing is exiting the Danish market and closing the 27 stores there. It's "optimising the corporate store network" by refranchising and closing between 65 to 70 underperforming corporate-owned stores, representing 2% of the global footprint.
The combined savings of those two actions "will" improve FY24 earnings before interest and tax (EBIT) by between $25 million to $30 million, with those savings expected to "increase over the next two years" as initiatives are completed, which could be supportive for the Domino's share price if margins improve. However, one-off costs of between $80 million to $93 million are expected.
It noted that same-store sales had improved in the quarter for the three months to June 2023, with a 3% rise (excluding Taiwan). Domino's and franchisees are focused on "growing weekly order counts to deliver stronger store profitability."
However, the ASX 100 share also revealed that despite those improvements, there has been a "slower than anticipated" rebuilding of weekly order counts, largely delivery orders. Due to that, underlying EBIT in the second half of FY23 has not improved compared to the first half.
The ASX share intends to deliver "materially higher profitability in FY24 and the medium-term."
In a sign of how hard profit might fall in FY23, current Commsec estimates suggest that Domino's shares could generate $1.46 of earnings per share (EPS). That would put the current valuation at 34 times FY23's forecast earnings.
Is the Domino's share price a bargain?
If Domino's profit never recovered, then the FY23 price/earnings (P/E) ratio wouldn't seem particularly appealing.
But analysts have pencilled in a sizeable earnings recovery for the business over the next two financial years. Current forecasts on Commsec suggest EPS of $1.70 in FY24 and $2 in FY25. That brings the FY25 P/E ratio to 25 times.
My colleague Tony Yoo recently reported on comments by Morgans investment advisor Jabin Hallihan who said to The Bull:
Our confidence is growing in an earnings recovery for this fast food giant. Early signs show a turnaround in the company's trading performance.
Despite wages growth headwinds, prior food inflation has reversed in most countries and cost-out plans are expected to sustain margins.
With the Domino's share price currently trading at around March 2020 – COVID-19 crash – levels, I'd suggest there is substantial scope for market confidence and the ASX 100 share's outlook to improve.
A recent return to same-store sales growth and initiatives to improve profitability make me believe there's a good opportunity here over a two to three-year timeframe as operating conditions recover.
