Domino's offshore opportunities deliver growth
Despite a difficult start to the year, Australia's largest pizza chain should see decent long-term growth, according to Morningstar.
Despite a difficult start to the year, Australia's largest pizza chain should see decent long-term growth, according to Morningstar.
Substantial local and overseas growth are key contributors to this outlook from Morningstar equities analyst Johannes Faul. He notes the disappointing half-year results, but believes Domino's Pizza Enterprise (ASX: DMP) is poised to substantially increase its existing store base in Australia and across Europe.
"Despite significant growth during recent years, Domino's is by no means a mature business.
"Australia can still increase its store base by about half in the next few years, and European growth is much more substantial, with potential to increase the existing store base by around 1,300 outlets to over 2,400 outlets over the next decade," Faul says.
He points to Domino's strong franchise model as core to its success, noting that in recent years, virtually all new stores in Australia and New Zealand were opened by insiders – either existing Domino's franchisees or store manages.
"This indicates that the company's franchise model remains attractive. Franchisees who are unhappy with their franchisor don't come back for more," Faul says.
Domino's Australian sales have grown by nearly 15 per cent a year over the past five years
He also calls out the "highly fragmented" pizza market in Europe, describing it as a significant opportunity for Domino's to take market share, and praises management's ability to adapt to market trends by "refreshing the product range, including healthier ingredient and gourmet styles, and transitioning to online ordering."
Sales in Domino's Australian market have grown by nearly 15 per cent annually over the past five years, and Faul expects growth rates of around 10 per cent per annum to continue into at least 2023.
The risk horizon
Faul says macroeconomic conditions outside of Domino's control could present risks to franchisees profits. These include slowing growth in takeaway food retailing, potential tightening of lending standards to franchise following the Banking Royal Commission, and increasing competition from independent pizza stores and other fast-service restaurants.
"If credit to franchisees were to be curtailed, demand could build up, at least in the short term," Faul says. But he believes any disruptions from macroeconomic events are likely to be temporary.
The Senate inquiry into the operation and effectiveness of the Franchising Code of Conduct also presents near-term risk to the Australian segment, especially if it results in an overhaul of the domestic franchising system. However, Faul insists Domino's is on the "front foot" with its recently implemented monitoring and investigative process to address franchisees misconduct.
Domino's is currently trading slightly undervalued at current prices – last close $51.42 -- to Morningstar's fair value estimate of $53.00 per share.
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Emma Rapaport is a reporter for Morningstar Australia.
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