Double miss takes a slice out of Domino’s price

Name: Domino’s Pizza Enterprises Ltd (ASX:DMP)

Market Capitalisation: $4.47 billion

Opening Share Price: $47.00

Shares in Domino’s Pizza opened 10% lower on Tuesday morning after the company delivered a below expectations result.

Not only was the net profit of $136.2 million shy of broker projections, but the dividend also came up short, and this perhaps more than the earnings miss may have been the main attributing factor in terms of explaining the sharp sell-off.

Same-store sales growth for the year and projections for next year may also have disappointed.

The final dividend was 49.7 cents, well short of Morgans’ expectations of 61.7 cents.

This brought the full year dividend to $1.08 which wasn’t quite as troubling if compared with the consensus full year forecast of $1.13.

Leading up to this result Domino’s was trading on a price-earnings (PE) multiple of 34 with earnings per share forecasts for 2018 and 2019 implying compound annual EPS growth of 17%.

Consequently, the stock was priced for outperformance, and when this is the case any disappointment can trigger a substantial sell off.

Operational performance

In the retail industry, businesses are largely judged by their same-store sales (SSS) figures, an area which Domino’s has excelled in in the past.

Achieving strong same-store sales growth indicates that the underlying business can deliver robust growth without the need to embark on capital intensive store expansion and/or acquisitions.

Granted, Domino’s has been investing heavily in acquisitions and store expansion, and fairly successfully generating robust year on year growth.

However, it is a much more mature business today with less scope to expand in established markets, indicating there is increasing pressure on its existing businesses to outperform.

Step back two years to when Domino’s was trading on its all-time high of $80.69 and the company was delivering outstanding growth.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Note that any decision with regards to adding this stock to your portfolio should be taken with caution and professional financial advice sought.

In 2016 the Australian and New Zealand operations recorded their second consecutive year of double-digit SSS growth (14.8%) while Europe was also up 8.2%.

Management guided to mid-range SSS growth of 11% and 6% respectively for Australia and New Zealand and Europe in 2017, and after that result recalibrated its projections in line with a more mature business, and one in which online sales where having a negative impact on in-store sales.

Fiscal 2018 mid-range SSS guidance provided at that time was 8% in Australia and New Zealand and 6% in Europe.

The results announced today featured SSS growth in Australia and New Zealand of 4.5%, with Europe coming in at 5.7% and Japan, a meagre 0.9%, but broadly in line with guidance.

It appears far from coincidental that the trends that have emerged over this two-year window have run parallel with a share price decline of circa 40%.

Though management has guided to net profit growth of circa 20% in 2018, investors may be taking a ‘show me the money’ stance.

They would also be aware that the company is still trading on a demanding PE multiple even taking into account today’s share price fall.

It is also worth noting that consensus forecasts leading up to today’s result reflected earnings per share growth of 21.4% in fiscal 2019.

Consequently, while 20% growth is better than the industry average, for a company trading on a forward-PE multiple in a range between 25 and 30, this level of earnings accretion is expected.