The investment team at Wilson Asset Management (WAM) aims to identify ASX shares that can deliver good returns. Within the WAM Leaders Ltd (ASX: WLE) portfolio, the fund managers have named the Domino's Pizza Enterprises Ltd (ASX: DMP) share price as an opportunity.
As we can see on the chart below, the fast food company has been through an enormous amount of pain lately. Domino's shares are down 20% in 2023 alone and have fallen more than 50% since the start of 2022.
Domino's Pizza Enterprises holds the exclusive master franchisor agreement for the Domino's brand and network in multiple countries across Europe and Asia and in Australia and New Zealand. It enables the company to own, operate and franchise Domino's stores.
In FY23, Domino's saw total network sales increase by 2.2% to $4 billion, while the number of stores increased by 11.7% to 3,782.
However, earnings before interest, tax, depreciation and amortisation (EBITDA) fell 12.4% to $347.2 million, and net profit after tax (NPAT) dropped 25.7% to $122.6 million.
Image source: Getty Images
What went wrong?
As a consumer cyclical share, profitability is key for the Domino's share price.
According to the pizza company, management increased menu prices to protect franchisee partner profits in the face of rising inflation.
However, it appears the size and manner of the price increases (such as delivery service fees) reduced order frequency, particularly for delivery orders.
Domino's said the reduction in the frequency of orders was not "immediately apparent", but "became clear over repeat purchases" at the end of the FY23 first half.
Domino's advised that it stabilised the frequency decline in the second half, through initiatives including 'flex pricing'.
Why is the Domino's share price a buying opportunity?
WAM has described the company's results as "solid", saying they relieved most concerns about soft economic conditions, elevated prices of costs, and the company's balance sheet leverage.
The fund manager added that the company's FY24 trading update "provided confidence in the outlook as same store sales growth started to return in Australia, New Zealand and across Europe."
In its tradingupdate for FY24, given at the time of the FY23 result release, Domino's said that European same-store sales had increased 6.6%, while ANZ same-store sales had also increased 6.6%. Each market was targeting higher volumes to improve unit economics and group profitability.
Domino's boss Don Meij said:
We believe our pricing for customers now appropriately balances the costs for our stores, while ensuring we deliver customers ultimate value. The key for our improved performance in FY24 is increasing the number of customers we serve each week.
The fast food business said that based on momentum at the time, it was expecting to deliver "material" sales and earnings improvements in FY24.
Domino's has taken a number of steps to improve profitability, including exiting the Danish market, "optimising" the corporate store network through a targeted program of closing underperforming stores and accelerating the refranchising of others, and 'streamlining' its operations.
By doing this, it's expecting to deliver network savings of between $50 million to $60 million in FY24, rising to $80 million to $94 million in FY25.
WAM explained why it thinks the Domino's share price can rise:
… We continue to hold Domino's Pizza Enterprises as we expect improved sales growth and therefore enhanced profitability to reaccelerate store rollouts. Combined with the company's prudent cost controls, this will drive a gradual recovery in the company's valuation.
