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Domino’s shares may soon resume their growth trajectory

Domino’s shares may start to move upwards as its growth strategy gets into gear. Where next?

dominos Source: Getty

2024 has not been kind to Domino's (ASX: DPM) shares. The stock has fallen by some 35% year-to-date to $38.35, mostly driven by a one day crash in mid-January when an unfavourable trading update caused investor consternation.

Indeed, the stock hit nearly $162 back in September 2021 as the company benefitted from pandemic-era demand, and was last at this price level during summer 2019 — some five years ago.

But green shoots may be emerging.

Domino’s trading updates

The mid-January trading update was the fourth profit downgrade in just three calendar years, with the company advising that it expected a preliminary net profit before tax of between $87 million and $90 million in the first half.

CEO Don Meij — who has been in post for more than two decades — also noted that ‘any previous guidance for FY24 performance, de facto or otherwise, is no longer in effect.’

When the results rolled around a month later, on 21 February, the situation seemed perhaps less dire than the prior market reaction might have suggested. For context, during the six months to 31 December 2023, the company returned to same store sales growth, while the ANZ region delivered its strongest growth in six years.

Overall, network sales rose by 8.8% to $2.14 billion, while online sales jumped by some 11.8% — though EBIT fell by 5.3% to $107.9 million compares to H1 2023.

Meij noted that ‘the fundamental strategies underlying our business remain unchanged: getting closer to customers helps deliver a hotter, fresher meal for our customers and reduces costs for our franchise partners.’

The CEO also advised that while earnings for the half were 22.8% higher than the immediately prior six month period, they were 5.3% lower year-over year. On the other hand, the company continues to progress its savings program to reach circa $50 million in this financial year.

Where next for Domino’s shares?

Over the past couple of months, Domino’s has released significant updates on its corporate strategy, including most recently its plans for European growth — where potential to capture further market share seems strong. And at least one investment bank seems to have taken on board the potentially improving conditions.

Citi recently upgraded the company from ‘hold’ to ‘buy’ on a $44.50 price target, with analyst Sam Teeger telling the Australian that ‘we have come away from the France part of the Europe investor tour with greater understanding of why Domino's has struggled and are cautiously optimistic that better days could be ahead in FY25.’

The investment bank also noted that while excessive discounting may have harmed the brand’s reputation, its agreement to allow third-party delivery via aggregator services could lead to higher volumes. Further, it also considers that summer may see strong growth given major events including the Paris Olympics and Euro 2024.

However, macro risks are also on the table. In a recent report, Morgan Stanley analysts argued that the rise of weight loss and appetite suppressant drugs like Ozempic could impact a huge variety of high calorie food brands — naturally this would include pizza. Indeed, it specifically notes that ‘quick service restaurants with a focus on unhealthy food items, including fried chicken and pizza, present with greater risks from a consumption standpoint.’

On the other hand, investors may be cheered by the recent Federal Budget, which in combination with the anticipation of falling rates could see more discretionary income enter the pockets of Domino’s consumers.

Domino’s may have struggled with its post-pandemic pivot, but the future could look appetising.

Past performance is not an indicator of future returns.

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