Three brokers slice into Domino's and ask whether the dip is worth buying

Domino’s Pizza (ASX: DMP) was obliterated on Wednesday, down -23.8% after its first-half net profits dropped by more than 21%.

CEO Don Meij was noble in his efforts to protect consumers from higher prices, noting that “in the initial stages of inflation, our expectation was that we could offset increased input costs by providing customers ‘more for more’ rather than passing price through.”

But the business eventually caved in – “Given the challenging conditions and the effect on our franchises we felt it was necessary to lift prices … however given the speed of the change it was difficult to forecast the effect on customer repurchasing rates.”

And boy did customers respond – “Specific customer groupings, particularly in delivery, reduced their ordering frequency which resulted in December trading being significantly below our expectations,” and that pain continued to linger in January.

From a financial perspective, revenue fell -4.3% to $1.15 billion, which was also below analyst expectations of $1.21 billion. Net profit tumbled -28.3% to $63.9 million.

With so much pain inflicted on the stock on Wednesday, is this a dip buying opportunity? Let’s hear what three major brokers had to say post earnings. 

Citi: Neutral with $58.00 target price

“We are increasingly debating whether Domino’s warrants the same premium in its multiple that it has historically had,” said Citi.

The commentary was extremely cautious and worried about whether or not this marks the beginning of more disappointing earnings. Key takeaways include:

• “Unless the company is willing to share more of its margin with franchisees and consumers there is potential that sales and store rollouts could continue to disappoint.” 

• Domino’s needs to increase its sales without adversely impacting its value proposition. This is proving to be more difficult that expected and may see margin headwinds in the short-to-medium term

• 1H23 saw 2.1% network growth, which requires a material improvement in 2H23 to hit the full-year target

Macquarie: Neutral with $55.00 target price

Macquarie said the result was disappointing given the capital raising in December and reiterated a preference for Staples “as the macroeconomic environment remains uncertain.”

Some key takeaways from the note include:

• Europe was the driving factor behind the miss. Same store sales growth was 0.3% while EBITDA was down -31%. The region did not handle the price changes well

• ANZ is “holding up for now” with same store sales growth of 1.7% and EBITDA ahead of expectations

• Outlook was cautious, with management now expecting same store sales growth and new store openings to be below its medium-term targets of 3-6% and 8-10% respectively 

Goldman Sachs: Neutral with $57.60 target price

Commentary from Goldman was largely in-line with the above. Some more interesting observations include:

• Europe and Asia both missed Goldman estimates by 20%, reflecting “volumes proved to be high price sensitive with price hikes.”

• “Management did not reiterate full-year profit guidance announced on 2nd November 2022, and given the disappointing in 1H23 … we expect Domino’s will likely miss this forecast.” 

Domino's 12-month share price chart