Is Domino’s Pizza Inventory a purchase?

Dominos Pizza (DPZ -0.40%) was one of the crucial resilient restaurant chains throughout the pandemic. The pizza chain’s delivery-based mannequin was understandably insulated from retailer closures, and its earlier investments in digital improvements – together with its cell app, good speaker options, smartwatch apps and even its autonomous supply robots – gave it an edge in on-line deliveries. .

However this yr Domino’s inventory has fallen almost 30% on fears of harder post-lockdown comparisons and hovering inflation. Rising rates of interest have additionally weighed on costlier progress shares like Domino’s, which had been buying and selling at greater than 40 instances ahead earnings after they hit an all-time excessive final December.

Picture supply: Domino’s Pizza.

Right now, Domino’s shares commerce at round 30 instances ahead earnings. Is it secure to purchase Domino’s once more, or is there much more draw back danger?

How briskly is Domino’s Pizza rising?

Domino’s nationwide same-store gross sales, worldwide same-store gross sales and international retail gross sales all accelerated considerably in fiscal 2020 (which led to January 2021) as extra folks stayed residence throughout the pandemic. It additionally continually opened new websites all through the disaster.

By evaluating, Yum! Manufacturers‘ Pizza Hut reported a 6% drop in similar retailer gross sales in 2020. Domino’s additionally stored tempo with its smaller rival Papa John’s Worldwidewhich elevated home and worldwide same-store gross sales by 18% and 13%, respectively, in fiscal 2020.

Metric FISCAL YEAR 2019 FISCAL YEAR 2020 FISCAL YEAR 2021 Q1 2022 Q2 2022
U.S. Identical Retailer Gross sales Progress (YOY) 3.2% 11.5% 3.5% (3.6%) (2.9%)
Worldwide comparable retailer gross sales progress (YOY) 1.9% 4.4% 8% 1.2%* (2.2%)*
New retailer openings 1,106 624 1,204 213 233
International Retail Gross sales Progress* (YOY) 8% 10.4% 11.7% 3.6% 1.5%

Information supply: Domino’s Pizza. YOY = yr after yr. FY = Fiscal yr. *Fixed forex.

Domino’s progress slowed in fiscal 2021 as pandemic-related tailwinds light, however its same-store gross sales remained constructive and it almost doubled its variety of new retailer openings.

However within the first half of fiscal 2022, its same-store gross sales started to say no. Its whole retail gross sales elevated additional, however that progress was fully pushed by its new retailer openings. This pattern is regarding as a result of it means that Domino could have overdeveloped itself – and it may wrestle to extend same-store gross sales in its new areas as they mature.

What headwinds is Domino’s Pizza going through?

Domino’s doesn’t imagine that is the case. As a substitute, he attributes his slowdown to a labor scarcity, particularly for supply drivers, inflationary headwinds and hard comparisons along with his pandemic and stimulus-related gross sales progress. over the previous two years. A robust greenback additionally lowered its worldwide revenue. Nonetheless, the corporate’s working margins and earnings per share (EPS) nonetheless declined considerably within the first half of fiscal 2022.

Metric FISCAL YEAR 2019 FISCAL YEAR 2020 FISCAL YEAR 2021 Q1 2022 Q2 2022
Working margin 38.8% 38.7% 38.7% 36.5% 36.3%
EPS progress (YOY) 14.5% 29.6% 9.3% (16.7%) (7.8%)

Information supply: Domino’s Pizza.

Throughout its second quarter report, Domino’s additionally raised its anticipated affect of inflation and forex headwinds for the total yr. It now expects to soak up a $22-26m affect from forex headwinds, up from its earlier forecast of $12-16m, and meals basket costs to rise 13% to fifteen%, in comparison with its earlier expectations of a ten% to 12% worth hike.

Outlook and valuations

For the total yr, analysts count on Domino’s whole income to rise 6%, with larger bills lowering its EPS by 6%. However in fiscal 2023, they count on its income and EPS to rise 7% and 19%, respectively, as some headwinds dissipate.

Domino’s enterprise is anticipated to stay secure over the long run, however its inventory could not need to commerce at greater than 30 instances ahead earnings, particularly as inflation, labor shortages and a robust greenback are capping its short-term positive factors. By comparability, yum! Manufacturers and Papa John’s are buying and selling at round 25 instances ahead earnings. Domino’s pays a ahead dividend yield of 1.1%, however that payout is not excessive sufficient to set a ground beneath its inventory.

Subsequently, it isn’t but the appropriate time to purchase Domino’s. Investing within the restaurant enterprise is already tough, and the mix of declining same-store gross sales and falling Domino margins is a brilliant pink flag.

Leo Solar has no place within the shares talked about. The Motley Idiot holds positions and recommends Domino’s Pizza. The Motley Idiot has a disclosure coverage.

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