Domino's DMP first-half fiscal 2025 earnings before taxes of $86 million met guidance. Declines in network and same-store sales of 3% and 1%, respectively, were announced early. Muted sales growth in recent weeks and uncertainty around expansion plans disappointed the makes and the stock fell 10%.

Why it matters: With first-half earnings in line with expectations and no detail on management's new rollout plans, we maintain our earnings estimates. We expect fiscal 2025 underlying profit to be virtually flat on last year at $1.33 per share.

  • Domino's is boosting annual earnings by $34 million by cutting costs and shuttering loss-making stores. We estimate this will lift fiscal 2026 EBIT by 16%, all else equal. There is more potential to save costs by simplifying the business, but we expect those to take longer.
  • The bulk of our forecast long-term earnings growth is tied to franchisees opening new stores. Franchise store profitability and demand for new stores hinge on same-store sales growth, which we expect to recover from fiscal 2026, together with a broader fast-food recovery.

The bottom line: Our fair value estimate for narrow-moat Domino's is $58 per share. Shares screen as cheap.

  • We think the market is extrapolating recent softer same-store sales growth and a slower store rollout and underestimating the massive growth of the firm's global network. For example, in its large European markets of Germany and France, Domino's covers only about a third of this geography.
  • While management is reviewing its ultimate target, we estimate Domino's footprint will increase 50% to 5,800 stores globally. This is about 20% below previous management's long-term target.

Coming up: We expect Domino's to update investors about its long-term plans at its strategy day in late fiscal 2025. A comprehensive strategic review is underway given the appointment of new CEO Mark van Dyck in November 2024.

Update on Domino's long-term potential due at upcoming strategy day

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.

Dominos 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 8% 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.

Dominos 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.

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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.