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Will Domino’s shares make a comeback?

Opinion

I recently stumbled on Macquarie’s Open Table national seated dinners chart, which offered a stunning surprise for those commuting to still-empty cities. It shows that Australia is back at pre-Covid levels in terms of eating out, as “restaurant seated diners” numbers have fully recovered. In March 2020, COVID-19 had a disastrous effect as it shut down restaurants around the globe, but more than two years later, Australia has led the world with its return to pre-Covid levels.

With that in mind, is Domino’s Pizza (ASX:DMP) poised to recover, after taking a brutal hammering after the pandemic?

Domino’s Pizza is Australia’s largest pizza chain, with a global network that spans ten countries. It was one of the first “Covid-winners,” being a beneficiary of the pandemic over the past two years as people stayed at home and ordered-in. But that trade has fully unwound. The pizza maker was one of the hardest-hit companies post-Covid. After peaking in September 2021, the restaurant franchise lost $2.3 billion from its market value, and is trading at $79.80 down from its 52-week high of $167.15. That’s a 52 per cent fall.

  • Owing to the war in Ukraine, costs have gone up. These include a $64 million increase in food, equipment, and packaging expenses, as well as an $11 million increase in employee expenses and a $16 million rise in marketing expenses. With food inflation on the rise and same-store growth likely to be lower, Domino’s says it won’t increase prices, but will come out with a new range of higher-price premium products.

    Share prices tend to be a function of future earnings, some 6-12 months ahead. People have gone back to dining at restaurants and food inflation has been rising. To counter this effect, the group has upsized meal offerings to enable it to recover costs. The company said “energy and utility costs in Europe were between 25 to 100 per cent higher and had meant inflationary pressures were much fiercer in that business. The use of electric bikes for deliveries in Europe was taking the pressure off soaring fuel costs.”

    The slowdown in sales in Japan was a huge outlier. DMP has 892 stores in Japan: once COVID ended, the Japanese stopped ordering pizzas and rushed out to restaurants.

    Domino’s shares have been hit hard not only from a fear that rising inflation would start biting into the bottom line but also from rising competition. A resurgent Pizza Hut is making its mark, with intentions to open more than 500 stores within four years.

    With shares trading at their pre-Covid levels, Morgans has a $100 target price with an ‘add’ recommendation. In mid-April the broker lowered its target price for DMP from $115, to allow for recent inflation pressure, and after moderating forecasts for near-term sales growth in Japan. The crisis in Ukraine has also some effect as it accounts for 30% of the global export market for wheat. “The recent conflict has raised prices in recent weeks not only for wheat but also vegetable oils and meat,” says Domino’s.

    The pent-up demand from people to go out and have a meal at a restaurant is almost exhausted. Restaurants are back to pre-Covid levels. Over the medium term, as the crisis in Ukraine ends and sales from takeaway businesses start to stabilise, earnings should once again start to rise, and stocks like Domino’s should benefit.




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