While brokers express significant disappointment over lower store rollouts and sales by
-Brokers materially lower target prices for
-Store rollouts, sales and costs all disappoint
-Management announces cost initiatives
-Is there risk of a debt covenant breach?
Brokers are becoming increasingly worried about the growth profile for
While management is planning to achieve substantial annualised cost savings, store openings will not meet FY23 or FY24 targets, and management flagged FY23 same store sales (SSS) growth remains below its medium-term outlook of 3-6% annual growth.
Domino's is the largest franchisee outside of the US and holds the master franchise rights to the Domino's brand and network in
Macquarie points out store rollout targets have been a key driver for Domino's growth over the years, while the secondary driver has been same store sales.
The company's store count target has been reduced by -150 stores, with the business removing its targets for the Danish business as it exits the market.
The way to improve SSS growth, suggest the analysts, is for management to improve execution of price and product offers to engage lapsed customers, who now prefer either supermarket pizza or other quick service restaurant (QSR) offerings.
As a result of these changing preferences, average customer frequency has blown out to six weeks from four.
In trying to mitigate inflation through the imposition of service fees, Morgans believes the company used the wrong approach, which was further exacerbated by a global shift away from delivery and by relentless input cost inflation.
This unhappy outlook prompts a ratings downgrade to Sell from Neutral, while
Citi also downgrades its rating to Sell from Neutral, with a similar decrease in target to
It's felt the near-term profitability of franchisees is unlikely to improve (thereby delaying the FY24 store rollout), which may require Domino's to share margin with customers and franchisees.
Moreover, this broker is wary of increasing competitive risks in
From a ratings standpoint, Jarden and Morgan Stanley maintain the faith with Overweight recommendations, while Morgans also sticks with its highest designation of Add.
Jarden has growing confidence orders will turn positive, input costs will continue to ease, and franchisee confidence should lift, via cost-out measures. As a result, accelerated earnings are expected, along with an improving return on invested capital (ROIC) and a higher valuation multiple.
Food costs are coming down in the APAC region and should benefit Domino's in the first half of FY24, according to Morgan Stanley. While these costs are yet to decline in
Cost Initiatives
The company announced a target for annualised cost savings of
Morgans believes plans to improve network earnings (EBIT) by
Jarden notes second half earnings guidance was lowered by around -21%, though felt cost initiatives, the exit from
Balance sheet risk?
Management is expecting to incur one-off costs of -
However, Morgans acknowledges there is a risk of breach should cost savings not eventuate.
FNArena's daily monitoring consists of six brokers who actively cover
There are three Buy (or equivalent) ratings, one Neutral and two Sell recommendations.
Overweight-rated Jarden is not a database broker. This broker lowered its target to
FNArena is proud about its track record and past achievements: Ten Years On
All material published by
© 2023 Acquisdata Pty Ltd., source