Global Expansion And Critical Innovations Propel The Company Into A Bright Future

Key Takeaways

• Expansion into China and India coupled with new product launches like the New York Style Pizza aims to increase customer base and revenue.
  
• Enhancements in operational excellence and loyalty programs, alongside strategic partnerships with delivery platforms, are set to boost customer satisfaction and sales growth.
  
• Challenges in international expansion, dependence on third-party delivery services, and currency fluctuations may impact Domino's growth and profitability.

Catalysts

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

• Expansion into high-growth markets like China and India, where significant store openings are planned, will likely contribute to future revenue and market share increases.
  
• The launch of new products such as the New York Style Pizza, tailored to increase customer base and order counts, is expected to enhance product mix and lift average sales per unit.
  
• The improved operational excellence, including better delivery times and product quality, should heighten customer satisfaction and loyalty, contributing to repeat business and revenue growth.
  
• Enhancements in the Domino's Rewards program, aimed at increasing user engagement and transaction growth, particularly in the carryout segment, could positively impact overall customer spend and loyalty.
  
• Strategic partnership with UberEATS and potential expansion into additional aggregator platforms after the exclusivity period, aiming to capture a larger share of online orders, could significantly contribute to sales growth and diversification of revenue sources.

Assumptions

• Analysts are assuming Domino's Pizza's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.4% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $691.5 million (and earnings per share of $20.49) by about August 2027, up from $572.8 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 30.2x on those 2027 earnings, up from 26.7x today. This future PE is greater than the current PE for the US Hospitality industry at 18.1x.
• Analysts expect the number of shares outstanding to decline by 0.35% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.75%, as per the Simply Wall St company report.

Risks

• Challenges in store openings and closures with Domino's Pizza Enterprises (DPE) may impact store network growth and limit expansion in key international markets, potentially affecting revenue.
  
• The reliance on third-party delivery services such as UberEATS for sales growth introduces dependence on external platforms, which could impact margins and revenue due to commission fees.
  
• The potential closures of low-volume stores, particularly in markets like Japan and France, might reflect broader issues in international operations that could hinder long-term growth aspirations and revenue.
  
• Intense competition, both domestically and internationally, requires continuous innovation and marketing efforts to maintain and grow market share, impacting operating expenses and net margins.
  
• Foreign currency fluctuations pose a risk to operating profit and revenue, particularly in international markets, as noted with the expected 1% impact on operating profit dollars.

Valuation

• The analysts have a consensus price target of $490.68 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 $580.0, and the most bearish reporting a price target of just $380.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.7 billion, earnings will come to $691.5 million, and it would be trading on a PE ratio of 30.2x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $437.61, the analyst's price target of $490.68 is 10.8% 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.