EUR 850.00 For Business Accounts Only

Morningstar | For Domino’s Tough Crowd, Tracking Within Guidance Just Isn’t Good Enough. AUD 53 FVE Unchanged

Narrow-moat-rated Domino’s Pizza provided a trading update at the bottom end of unchanged guidance--clearly not good enough for some with the stock retreating sharply in the aftermath of the announcement. We see through the short-term trading volatility. Our long-term outlook on Domino’s growth trajectory is intact, underpinned by the solid runway of new organic stores and continuing, albeit moderating, same-store sales growth for the group compared with prior years. We maintain our fiscal 2019 estimates and AUD 53 fair value estimate, with shares screening as slightly undervalued at current prices.

The trading update was on the weaker side but tracked with our more cautious fiscal 2019 outlook. Like-for-like sales growth of 2.9% year-to-date was just short of the lower end of management’s guidance range of 3%-6% for the full-year 2019, but broadly in line with our unchanged 3.0% estimate. Japan was the bright-spot, with strong same-store sales growth of 5%. This is in stark contrast to virtually flat same-store sales over the past four years. Europe was called out for having had a challenging start to the year with summer heat waves ravaging the continent and proving nonconducive for pizza cravings.

The company’s store roll-out plans are unchanged, for the current year as well as the long-term aspirations. Organic store openings for the full year are still targeted at 225-250 and we maintain our forecast of 220 new stores.

Moving on to the bottom line, management reaffirmed its full-year underlying EBIT guidance range of AUD 227-247 million. Our fiscal 2019 EBIT estimate stands too, at AUD 250 million. We expect operating leverage to improve Domino’s EBITDA margin to 23%, slightly higher than the 22% in fiscal 2018 and implied by guidance.