Research: Consumer
Domino’s Pizza Group’s (DOM’s) new CEO has set an ambitious long-term growth target, including an acceleration in its net store opening programme. With better alignment between the company and its franchisees, management believes DOM should be capable of generating improved profit growth, versus that achieved in recent years, and potential higher returns.
Domino’s Pizza Group |
Growing the base
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Restaurants |
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16 April 2024 |
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Domino’s Pizza Group’s (DOM’s) new CEO has set an ambitious long-term growth target, including an acceleration in its net store opening programme. With better alignment between the company and its franchisees, management believes DOM should be capable of generating improved profit growth, versus that achieved in recent years, and potential higher returns.
Setting out its store
The medium-term (FY28) and new long-term (FY33) targets for systems revenue (ie the franchisees’ gross revenue) of over £2bn and £2.5bn, respectively, represent attractive CAGRs of at least c 5% that are broadly in line with the CAGR from FY18–22. The majority of the expected growth (ie c 4% pa) is due to space growth in new territories and splits of franchise locations, with the aspiration to grow to 2,000 stores by FY33 (1,319 at end FY23). The space expansion will increase its customer reach in new territories and hopefully improve in-territory sales per customer. Here, drivers include: ongoing menu innovation (such as other foods and more healthy options); targeting new dayparts (such as lunchtime); greater customer collections (37% of orders currently vs 50%+ in the US), which enhances profitability; and convenience for customers (ie DOM’s products are now available on both the Just Eat and Uber Eats delivery platforms).
Consensus forecasting margin recovery
Consensus is forecasting revenue growth of c 8% in FY24 (on the 52-week FY23 base), followed by c 11% growth in FY25, helped by taking control of its largest Irish franchise. Of greater significance is the forecast for some improvement in the underlying EBIT margin to 17.6% in FY25, helped by some benefit from lower investment, from FY23’s (52-week period) 17.0%. The underlying EBIT margin remains below FY18–21 margins, which were consistently above 20%.
Discount to historical multiples
In assessing DOM’s valuation, we look at FY18 onwards when it became solely focused on the UK and Ireland, following the disposal of operations in some European countries. The prospective FY24e EV/sales multiple (excluding lease liabilities to aid comparison over time) of 2.2x, looks low versus post-FY17 average multiples of 2.8–3.4x (excluding the distortions from the COVID-19 pandemic), even when allowing for its expected lower, but improving, levels of profitability. The prospective P/E multiple of 16.4x is just below the recent average of 17.7x, so offers some upside if management can deliver higher earnings growth than recent years.
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Consensus estimates
Source: LSEG. Note: As at 15 April 2024. *53-week accounting period. |
EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Research: TMT
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