Digital Investments And Ireland Expansion Will Boost Future Market Presence

Key Takeaways

• The Profit Growth Framework aims to enhance revenue and margins through franchisee alignment and store expansion, driving customer and market growth.
  
• Investments in digital, supply chain automation, and store expansion in less saturated areas are expected to boost revenue and operational efficiency.
  
• Reliance on supply chain performance and franchisee growth, amid competitive and macroeconomic challenges, could impact margins, revenue, and strategic targets.

Catalysts

Domino’s Pizza Group plc owns, operates, and franchises Domino’s Pizza stores.

• The new Profit Growth Framework (PGF) with franchisees is designed to drive both customer growth and store expansion, establishing stability and alignment. This should contribute to increased revenue and improved net margins.
  
• Expansion opportunities in Ireland, particularly through increased ownership in the Victa Joint Venture, are expected to drive organic growth in a less saturated market compared to the U.K. This could enhance revenue and earnings in the medium term.
  
• Investments in digital acceleration, including loyalty programs and improved data analytics, aim to increase customer frequency and retention. This focus on digital and customer engagement is likely to boost revenue growth.
  
• Continued automation across supply chain centers and investment in a new supply chain center aim to improve operational efficiencies, which should result in higher net margins and EBITDA.
  
• Store expansion plans, especially in regions with significant white space, including smaller towns, are expected to increase market penetration and drive revenue growth, supporting a long-term target of reaching 1,600 to 2,000 stores.

Domino's Pizza Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Domino's Pizza Group's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.6% today to 11.7% in 3 years time.
• Analysts expect earnings to reach £96.9 million (and earnings per share of £0.26) by about March 2028, up from £90.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.3x on those 2028 earnings, up from 12.8x today. This future PE is greater than the current PE for the GB Hospitality industry at 14.9x.
• Analysts expect the number of shares outstanding to decline by 1.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.55%, as per the Simply Wall St company report.

Domino's Pizza Group Future Earnings Per Share Growth

Risks

• DPG's reliance on its supply chain performance could pose risks, as decreases in supply chain revenue from food price deflation and other supply chain challenges may affect overall EBITDA and revenue stability.
  
• The competitive landscape, particularly from offers like Papa John's revamped loyalty scheme, may pressure Domino's to enhance promotional activity, which could impact margins and revenue.
  
• The uncertainty in the macroeconomic environment, which includes factors like consumer spending patterns and input costs such as higher labor, food, and fuel costs, may affect franchisee profitability and overall company margins.
  
• The dependence on franchisee growth and profitability for long-term strategic success means any downturn in franchisee willingness or capability to maintain profitability might impact revenue and store growth targets.
  
• The focus on geographical expansion, such as in Ireland, and new store openings, while positive for growth, comes with risks like planning challenges, higher competition, and potential overextension, which can impact future earnings and financial performance.

Valuation

• The analysts have a consensus price target of £3.766 for Domino's Pizza Group 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 £5.0, and the most bearish reporting a price target of just £2.71.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £827.4 million, earnings will come to £96.9 million, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 9.6%.
• Given the current share price of £2.95, the analyst price target of £3.77 is 21.7% 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.