Inflation Takes a Big Bite Out of Domino’s Pizza Near-Term Profits, but Selloff Is Overdone

We cut medium-term earnings estimates for narrow-moat Domino’s Pizza DMP after a surprisingly disappointing interim result. Our fair value estimate decreases by 4% to AUD 68 per share. Domino’s network sales volumes deteriorated significantly in December 2022 and have remained subdued so far in 2023.

Domino’s recent price increases for pizzas and delivery charges have made its value offering less appealing to consumers. Because of rampant cost inflation, Domino’s decided to raise prices to bolster store sales and franchisee profitability, which, in turn, determine franchisee appetite for new store openings. However, Domino’s seemingly misjudged the price elasticity of demand for its product, with the drop off in sales volumes more than offsetting the benefit of higher prices. The ensuing 4% decline in network sales, together with rising costs, unfavorable foreign-exchange movements, and one less trading week in the period, saw NPAT down 22% in the first half. The board declared an interim dividend of AUD 67.4 cents per share, down 24% on the prior corresponding period. The dividend is 60% franked.

Domino’s has been losing market share. The wider quick service restaurant industry itself is humming, burgers are especially in demand. Also, customers seeking to cut back on costs are also switching to the cheaper, albeit less convenient, carryout channel. Dining-in and drive-thrus are outperforming the delivery channel. The channel mix shift is a headwind for Domino’s network sales, because the average ticket for deliveries is higher than carryout.

However, we expect Domino’s to improve its pricing structure. And we expect same-store sales growth to gradually improve against a backdrop of continued strong consumer demand for fast food.