Domino's Pizza DMP is closing around 200 loss-making stores. Most are in its embattled Japanese market where it aggressively expanded its footprint due to high demand during the pandemic. The closures are a setback to its strategy to materially expand its global store network.

Domino’s Pizza is included in our Global Equity Best Ideas list. However, shares surged over 21% after reporting results. Despite the increase the shares remain 38% undervalued.  

Why it matters: Many recently opened Japanese stores are unprofitable at normalized sales levels, with cost inflation outstripping same store sales growth. However, while the closures are a setback for Domino's store rollout, closing loss-making stores boosts earnings by $16 million from fiscal 2026.

  • The 172 Japanese stores to be closed in the second half of fiscal 2025 represent about 20% of Domino's network in Japan. However, total closures of 205 stores globally are only 5% of Domino's global footprint.
  • Its ultimate network target is now more uncertain. We reduce our long-term estimate by 3% to 5,800 stores globally, which is about 20% below previous management's long-term target.

The bottom line: Our fair value estimate for narrow-moat Domino's stands at $58. The time value of money impact offsets a mid-single-digit reduction in our long-term earnings forecast and store closure costs. Shares screen as significantly undervalued.

  • We think the market is extrapolating recent softer same store sales growth and a slower store rollout, and underestimating the massive growth of its global network.
  • We forecast a 20% earnings compound annual growth rate for the next five years, underpinned by same store sales growth and the global store rollout. Our forecast 2025 dividends per share of $1.16 per share fully franked, represents a 3% yield at the current share price.

Between the lines: Despite muted sales growth, profit margins are recovering faster than expected. First-half adjusted net profit after tax is guided at $84 to $86 million, tracking ahead of our previous full-year earnings estimates. We increase our fiscal 2025 earnings per share estimate by 7% to $1.78.

Domino’s significant long-term growth potential intact

Domino's Pizza Enterprises is the Australian master licence holder of the Domino's Pizza brand. It also has operations in New Zealand, Japan, Singapore, Malaysia, France, Germany, Belgium, Luxembourg, Taiwan, Cambodia, and the Netherlands. The stock suits investors seeking exposure to the food and beverage sector. Management is active, importing marketing strategies from the United States, or creating new ones, and applying them to local trends in individual markets. Management has adapted to market trends by refreshing the product range, including healthier ingredients and gourmet styles, and transitioning to online ordering.

As a master franchisee, Domino's has limited capital requirements, which means royalty payments it receives in the future should continue to be paid as partially franked dividends. This makes returns on invested capital very attractive. Brand and scale are key competitive advantages warranting a narrow economic moat rating, and future growth prospects are significant. Despite significant growth during recent years, Domino's is by no means a mature business. Australia can still increase its store base by about one third in the next few years, and European growth is much more substantial, with potential to more than double the existing store base to around 2,900 outlets during the next decade.

Risks include a change in consumer taste for pizza as a food category and growth execution risk, particularly with differences between Australian, Asian, and European business environments. Good management can navigate these changes. McDonald's modified its menu in response to an increasingly health-conscious society; we see this as a perfect example of a food business changing with the times.

Domino’s bulls say

  • Domino's is a highly visible brand based on a successful US business model. Across Domino's three regions, sales have increased at a CAGR of 9% over the past five years. We expect network sales to continue in the high single digits over the next five years.
  • The pizza market in Europe is highly fragmented, presenting significant opportunity for Domino's to take market share with an attractive value proposition, increased convenience to the customer, and a differentiated product offering.
  • The company's large network size has positive implications for discounted supplier arrangements.

Domino’s bears say

  • There is a high level of competition, stemming from independent pizza stores and other quick-service restaurants.
  • The company might evaluate its target markets in new countries incorrectly, given the geographical distance and cultural variances.
  • The low-price business model may still be affected by slowing retail and discretionary spending.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.