Domino's Pizza has achieved global ubiquity, but is its extensive presence beginning to negatively impact its stock performance?
How Domino's Operates
Domino's relies heavily on a franchise model, with 99% of its over 20,700 stores being independently owned. The company's strategy emphasizes digital innovation and value promotions, such as "boost" weeks offering 50% discounts. However, its rapid expansion strategy is encountering obstacles. Domino's Pizza Enterprises, its largest franchisee, announced the closures of low-performing stores in Japan and France, leading to a projected shortfall of 275 new stores this year.
Financial Performance and Valuation
Domino's reported a 7% increase in total revenue for Q2 2024, aligning with expectations. However, same-store sales growth fell short, with the boost in revenue primarily driven by the opening of 175 new stores during the quarter. Despite a strong net income increase of 30%, due mainly to lower tax rates and remeasurement gains, operating profits saw a marginal rise of less than 1%.
At a valuation of 31 times earnings, many analysts consider Domino's stock overpriced. The company plans to open 925 new stores this year, down from the expected 1,100. This slower expansion rate and high valuation make Domino's stock appear expensive to many investors.
Analyst Sentiment
The consensus rating is "Moderate Buy" from 29 analysts, with a 12-month average price target of $535.29, suggesting a potential upside of 30.86% from its current price. Optimists like TD Cowen's Andrew Charles and Oppenheimer's Brian Bittner highlight potential earnings revisions and valuation expansion due to new initiatives and partnerships. However, Bernstein's Danilo Gargiulo and others maintain a "Hold" rating, citing concerns over sustainable growth.
Comparison with Competitors
Domino's faces stiff competition compared to other major pizza chains like Pizza Hut and Papa John's. Pizza Hut, part of Yum! Brands, has been focusing on increasing digital sales, which now represent 44% of global system sales, giving it a competitive edge. Meanwhile, Papa John's struggles with international profit contributions and EBIT margins present a less favorable outlook.
Domino's May Need To Recalibrate
Once considered its greatest strengths, Domino's extensive global presence and aggressive strategies are now under intense scrutiny. The recent financial setbacks and cautious analyst outlook suggest the company may need to recalibrate its strategy.
Neither Sean Kelland nor Stocks.News have positions in Domino's.
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Financial Commentator
Sean Kelland is a financial commentator with a keen interest in the intricate interplay between geopolitical movements and market dynamics. With a sharp eye for curating leading analyst insights, Sean delivers timely and impactful financial content that navigates the complexities of the global market. Drawing on his extensive experience in content creation and writing, he provides readers with val...