Simplifying Business Will Reduce Complexity And Costs In Future

Key Takeaways

• Simplifying the business model and closing underperforming stores aim to cut costs, improve efficiency, and boost profit margins.
  
• Focusing on IT, marketing, and product simplification is expected to enhance operational efficiency, customer experience, and long-term profitability.
  
• Closure of loss-making stores and challenges in key markets highlight operational inefficiencies, potentially impacting profitability and shareholder returns amid global cost-of-living pressures.

Catalysts

Operates retail food outlets.

• Domino's Pizza Enterprises is undertaking a strategic review that focuses on simplifying its business model by reducing complexity, which includes lowering packaging SKUs. This simplification is expected to enhance operational efficiency, reduce costs, and improve profit margins for both franchise partners and shareholders in the future.
  
• The closure of 205 loss-making stores, primarily in Japan, is a short-term operational tactic to remove underperforming assets, which is expected to result in annualized network benefits of $15.5 million. This should positively impact profitability and potentially improve long-term revenue growth and earnings as remaining stores capture retained sales from the surrounding areas.
  
• By refocusing spending on IT, marketing, ingredients, and packaging, Domino's is implementing cost-saving initiatives projected to deliver annualized network benefits of $18.6 million. These efforts in cost reduction are expected to improve net margins and earnings going forward.
  
• Domino's is exploring product development and simplification initiatives, such as reducing packaging options and streamlining online ordering processes, to lower operational costs and enhance customer experience. This strategy aims to increase revenue through higher order conversion rates and improve profitability by reducing cost of goods sold.
  
• The strategic focus on execution improvement, such as aligning pricing and promotions with customer preferences in France and Japan, is intended to enhance same-store sales growth and drive franchisee profitability. This could lead to higher revenue and potentially bolster both franchisee and shareholder earnings over time.

Domino's Pizza Enterprises Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Domino's Pizza Enterprises's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 7.6% in 3 years time.
• Analysts expect earnings to reach A$199.6 million (and earnings per share of A$2.14) by about March 2028, up from A$12.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$256.2 million in earnings, and the most bearish expecting A$143.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, down from 196.9x today. This future PE is lower than the current PE for the AU Hospitality industry at 22.3x.
• 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 8.96%, as per the Simply Wall St company report.

Domino's Pizza Enterprises Future Earnings Per Share Growth

Risks

• Closure of 205 loss-making stores, particularly in Japan, indicates underlying operational inefficiencies and short-term financial strain, potentially impacting future revenue and profitability until turnaround strategies are effective.
  
• Challenges in France with turnaround efforts not delivering expected results could undermine confidence in market strategies and continue to negatively impact network sales and earnings.
  
• Sustained cost-of-living pressures globally may lead consumers to reduce discretionary spending on QSRs like Domino’s, affecting same-store sales growth and overall revenue.
  
• Complexity from expanding into new markets such as Taiwan, Malaysia, Singapore, and Cambodia without simplification could hinder operational efficiency, negatively impacting profit margins and franchisee profitability.
  
• Uncertain timelines for franchisee profitability improvement, particularly in Japan and France, could delay expected earnings growth and recovery of the profit model, affecting shareholder returns.

Valuation

• The analysts have a consensus price target of A$34.489 for Domino's Pizza Enterprises based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$58.0, and the most bearish reporting a price target of just A$24.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$2.6 billion, earnings will come to A$199.6 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 9.0%.
• Given the current share price of A$26.4, the analyst price target of A$34.49 is 23.5% higher.
• 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.