Rising Regulatory Scrutiny And Ghost Kitchens Will Hamper Pizza Demand

Key Takeaways

• Changing consumer preferences, regulatory pressures, and new taxes threaten demand and margins, while digital competition and ghost kitchens erode market share.
  
• Operational and franchisee challenges across key markets, combined with rising costs and sustainability requirements, hinder growth prospects and burden profitability.
  
• Digital investments, operational simplification, and targeted expansion in underpenetrated regions position the company for sustainable growth in revenue, margins, and network scale.

Catalysts

Operates retail food outlets.

• The rapid shift in global consumer preferences toward healthier eating, increased regulatory scrutiny of high-calorie/processed foods, and the potential for new taxes on fast food in developed markets are expected to suppress demand for Domino's core pizza offering, impeding top-line revenue growth and margin expansion over the next decade.
  
• Domino's is facing accelerating digital disruption, with rising competitive threats from delivery-first market entrants, the spread of third-party aggregators, and the proliferation of ghost kitchens. These trends threaten to erode Domino's market share and compress net margins by intensifying price-based competition and weakening brand differentiation.
  
• Increasing international operational complexity and ongoing underperformance in large markets such as Japan and France expose Domino's to heightened risk. These operational challenges reduce the reliability of future revenue and earnings growth from geographic expansion, especially as management must now prioritize costly restructuring and execution over growth initiatives.
  
• Franchisee profitability pressures caused by persistently higher food, labor, and energy costs are likely to slow new store openings, increase the risk of further store closures, and limit Domino's ability to leverage its network for future earnings growth and margin recovery.
  
• Escalating labor and compliance costs, along with rising environmental sustainability requirements in areas such as packaging and emissions, are projected to further erode store-level and group margins, requiring sustained investments that will dilute near
• to medium-term earnings and constrain free cash flow.

Domino's Pizza Enterprises Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Domino's Pizza Enterprises compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Domino's Pizza Enterprises's revenue will decrease by 0.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.5% today to 7.4% in 3 years time.
• The bearish analysts expect earnings to reach A$166.1 million (and earnings per share of A$1.75) by about August 2028, up from A$12.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 138.9x today. This future PE is lower than the current PE for the AU Hospitality industry at 33.2x.
• Analysts expect the number of shares outstanding to grow by 1.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.85%, as per the Simply Wall St company report.

Domino's Pizza Enterprises Future Earnings Per Share Growth

Risks

• The ongoing digitalization of food ordering and Domino's investment in digital platforms are streamlining the ordering process and improving conversion rates, which is likely to increase order frequency and drive higher revenues and earnings over the long term.
  
• Domino's continued focus on simplifying operations, supply chain efficiency, and procurement excellence is expected to drive sustainable cost reductions, supporting margin expansion and bolstering net profitability.
  
• Network and same-store sales growth initiatives in large, underpenetrated markets like Germany, the Benelux region, and Asia create room for long-term expansion, potentially leading to higher revenue and earnings as these markets scale and operational issues are resolved.
  
• The company's successful turnaround in regions such as Australia-demonstrated by margin and share gains even in weak consumer environments-suggests that consistent execution and operational improvement can restore growth and improve net margins group-wide.
  
• Franchisee profitability is a core focus, and as store-level economics improve through cost savings and sales growth, there is strong potential for franchisee reinvestment and accelerated store openings, fueling network expansion and driving both top line and bottom line growth.

Valuation

• The assumed bearish price target for Domino's Pizza Enterprises is A$14.2, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Domino's Pizza Enterprises's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$46.0, and the most bearish reporting a price target of just A$14.2.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$2.3 billion, earnings will come to A$166.1 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of A$18.24, the bearish analyst price target of A$14.2 is 28.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.