Mac & Cheese And Uber Partnerships Will Expand Customer Engagement

Key Takeaways

• New product innovations and strategic rewards programs are boosting customer engagement and transaction growth, positively impacting revenue and earnings.
  
• Strategic partnerships and international market expansion efforts are opening new sales channels, contributing to revenue and earnings growth.
  
• Competitive value offerings, macroeconomic pressures, and dependence on external platforms may challenge Domino's pricing power, sales growth, and long-term revenue sustainability.

Catalysts

Through its subsidiaries, operates as a pizza company in the United States and internationally.

• Domino's Hungry for MORE strategy is driving substantial market share growth in the U.S. by focusing on renowned value, contributing to higher transaction growth and supporting same-store sales growth. This is likely to positively impact revenue and earnings.
  
• The successful introduction of new products like Mac & Cheese and ongoing product innovation is expected to continue to attract new customers and increase average ticket size, positively affecting revenue and earnings.
  
• The expansion of the Domino's Rewards program and targeted marketing efforts are increasing customer frequency and engagement, which is expected to drive transaction growth and higher revenue.
  
• Strategic partnerships with aggregators like Uber and potential future deals with other services are opening new sales channels, contributing to incremental sales growth that can bolster revenue and earnings.
  
• Domino's focus on international market improvement through aggressive promotional pricing and expansion of offerings beyond delivery, such as carryout and dine-in, aims to stabilize and eventually grow same-store sales, supporting global revenue growth.

Domino's Pizza Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Domino's Pizza's revenue will grow by 6.2% annually over the next 3 years.
• Analysts are assuming Domino's Pizza's profit margins will remain the same at 12.3% over the next 3 years.
• Analysts expect earnings to reach $688.5 million (and earnings per share of $20.44) by about December 2027, up from $572.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.1x on those 2027 earnings, up from 27.0x today. This future PE is greater than the current PE for the US Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

Domino's Pizza Future Earnings Per Share Growth

Risks

• Increased intensity around value offerings from competitors could challenge Domino’s ability to maintain pricing power and profit margins, potentially impacting net margins.
  
• The expectation of only 1% to 2% same-store sales growth in the international markets through 2025 suggests underperformance and macroeconomic pressures, which could affect overall revenue growth.
  
• Dependence on external platforms like Uber Eats and potential future reliance on DoorDash could cannibalize direct sales channels and pressure margins due to commission fees, impacting net margins and earnings.
  
• Lower-income customer softness, particularly in delivery, combined with competitive promotions from major competitors, poses risks to sustaining order volumes and could directly impact revenue and net margins.
  
• Continued weakness in international markets due to geopolitical and macroeconomic pressures may not significantly impact profits short-term due to an asset-light model, but prolonged underperformance could affect long-term revenue and profit sustainability.

Valuation

• The analysts have a consensus price target of $480.65 for Domino's Pizza 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 $559.0, and the most bearish reporting a price target of just $370.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.6 billion, earnings will come to $688.5 million, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 8.1%.
• Given the current share price of $446.74, the analyst's price target of $480.65 is 7.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.