Domino's Pizza (DPZ 2.10%) was one of the most resilient restaurant chains during the pandemic. The pizza chain's delivery-based model was naturally insulated from store closures, and its prior investments in digital innovations -- including its mobile app, smart-speaker features, smartwatch apps, and even autonomous delivery robots -- gave it an edge in online deliveries.
But this year, Domino's stock has declined nearly 30% amid concerns of tougher post-lockdown comparisons and soaring inflation. Rising interest rates also squeezed pricier growth stocks like Domino's, which traded at over 40 times forward earnings when it hit its all-time high last December.
Image source: Domino's Pizza.
Today, Domino's stock trades at about 30 times forward earnings. Is it safe to buy Domino's again, or does it still have more downside risk?
How fast is Domino's Pizza growing?
Domino's domestic same-store sales, international same-store sales, and global retail sales all accelerated significantly in fiscal 2020 (which ended in January 2021) as more people stayed at home during the pandemic. It also consistently opened new locations throughout the crisis.
By comparison, Yum! Brands' Pizza Hut posted a same-store sales decline of 6% in 2020. Domino's also kept pace with its smaller rival Papa John's International, which grew its domestic and international same-store sales by 18% and 13%, respectively, in fiscal 2020.
|
Metric |
FY 2019 |
FY 2020 |
FY 2021 |
Q1 2022 |
Q2 2022 |
|---|---|---|---|---|---|
|
U.S. Same Store Sales Growth (YOY) |
3.2% |
11.5% |
3.5% |
(3.6%) |
(2.9%) |
|
International Same Store Sales Growth (YOY) |
1.9% |
4.4% |
8% |
1.2%* |
(2.2%)* |
|
New Store Openings |
1,106 |
624 |
1,204 |
213 |
233 |
|
Global Retail Sales* Growth (YOY) |
8% |
10.4% |
11.7% |
3.6% |
1.5% |
Data source: Domino's Pizza. YOY = Year over year. FY = Fiscal year. *Constant currency.
Domino's growth decelerated in fiscal 2021 as the pandemic-related tailwinds waned, but its same-store sales remained positive and it nearly doubled its number of new store openings.
But in the first half of fiscal 2022, its same-store sales started to decline. Its total retail sales still rose, but that growth was entirely driven by its new store openings. That trend is worrisome because it suggests that Domino's might have overexpanded -- and it could struggle to grow its same-store sales in its newer locations as they mature.
What headwinds does Domino's Pizza face?
Domino's doesn't think that's the case. Instead, it attributes its slowdown to a labor shortage, especially for delivery drivers, inflationary headwinds, and difficult comparisons to its pandemic and stimulus-driven sales growth over the past two years. A strong dollar has also been reducing its international revenue. Nevertheless, the company's operating margins and earnings per share (EPS) still declined significantly in the first half of fiscal 2022.
|
Metric |
FY 2019 |
FY 2020 |
FY 2021 |
Q1 2022 |
Q2 2022 |
|---|---|---|---|---|---|
|
Operating Margin |
38.8% |
38.7% |
38.7% |
36.5% |
36.3% |
|
EPS Growth (YOY) |
14.5% |
29.6% |
9.3% |
(16.7%) |
(7.8%) |
Data source: Domino's Pizza.
During its second-quarter report, Domino's also raised its anticipated impact from inflation and currency headwinds for the full year. It now expects to absorb a $22 million to $26 million impact from currency headwinds, compared to its prior forecast of $12 million to $16 million, and for food basket prices to increase 13% to 15%, versus its previous expectations for a 10% to 12% price hike.
The outlook and valuations
For the full year, analysts expect Domino's total revenue to rise 6% as those higher expenses reduce its EPS by 6%. But in fiscal 2023, they expect its revenue and EPS to grow 7% and 19%, respectively, as some of the macro headwinds dissipate.
Domino's business should remain stable over the long term, but its stock arguably doesn't deserve to trade at more than 30 times forward earnings -- especially as inflation, labor shortages, and a strong dollar all cap its near-term gains. By comparison, Yum! Brands and Papa John's both trade at about 25 times forward earnings. Domino's pays a forward dividend yield of 1.1%, but that payout isn't high enough to set a floor under its stock.
Therefore, it's not the right time to buy Domino's yet. It's already tough to invest in the restaurant sector, and Domino's mix of declining same-store sales and shrinking margins is a bright red flag.
