Could the 'clear path to recovery' for Domino's shares be in doubt?

Domino's has some ambitious growth targets, but are they achievable?

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Domino's Pizza Enterprises Ltd (ASX: DMP) shares closed down 3.11% yesterday trading for $37.38 apiece. This marked a new and unwanted multi-year low.

The S&P/ASX 200 Index (ASX: XJO) fast food pizza retailer has been under selling pressure amid slow and even negative growth in its Asian and European markets.

Domino's shares came under renewed selling pressure in January after the company reported slowing sales in Japan, Taiwan and France, among others.

On Friday, Domino's CEO Don Meij held a strategy update intended to illustrate the path forward to better times.

And certainly, the company operates in a growing and potentially lucrative market. Meij said the US$1.2 trillion global online food delivery sector is forecast to grow 10% every year.

Despite highlighting company growth targets – including a near doubling of stores in Japan by 2030 – and cost reductions, investors appeared sceptical.

Domino's shares closed down 7.5% on the day.

What are the experts saying?         

A number of prominent brokers appear to agree with the investors selling down Domino's shares following the strategy update.

According to analysts at Goldman Sachs:

We do not believe the company dissected the core issues of the problem regions such as France and Japan sufficiently and hence there remains a lack of transparency and conviction on how they will fix these issues.

We remain unconvinced post this strategy day that there is a path to clear recovery other than further discounting and pausing of store roll-out in Japan/France to restore profitability.

The broker has a neutral rating on Domino's shares with a $39.70 price target. Despite Goldman's scepticism, that's 6.0% above yesterday's closing price.

Citi's Sam Teeger said that rather than increase the store count in Japan, Domino's may shutter some outlets in the medium term.

According to Teeger (quoted by The Australian Financial Review):

In Japan, Domino's appears to have rolled out too fast and too broad geographically, when in hindsight it may have benefited from clustering stores in prefectures to achieve better scale, before moving on to the next prefecture.

A more bullish outlook for Domino's shares

There are certainly still reasons to be optimistic about the medium and longer-term outlook for Domino's shares.

Indeed, some analysts see potential gains of more than 80%.

Morgan Stanley, for example, recently came out with an overweight rating on the ASX 200 pizza retailer's stock with a $68.00 price target.

That represents a potential upside of more than 82% from Domino's closing share price on Tuesday.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bernd Struben 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 and Goldman Sachs Group. 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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