Owning shares in London-listed Domino’s Pizza Group (LSE: DOM) has not been a rewarding choice lately. The Domino’s Pizza share price has fallen around 18% in the past several weeks. That means they are now 24% below where they were a year ago.
I think there is an obvious reason for this – and fear the shares could still go lower from here.
Demand concerns
When there is a recession, pundits go into overdrive discussing what it means for specific products. One theory is that lipstick sales go up, as consumers treat themselves to small luxuries instead of larger ones.
A more intuitive theory is that cash-strapped consumers cut back on non-essential expenditure. They dine out less and instead opt to eat more cheaply at home. But what about the sort of takeaway food specialised in by Domino’s? If demand falls, that could hurt the Domino’s share price.
Unsettling US trend
One clue came this week from New York-listed Domino’s Pizza (NYSE: DPZ) (a different company to the UK firm that has the local franchise). Its same-store sales in the US grew less than 1% last year. In what the company terms its international division (which excludes the UK-listed Domino’s), year-on-year growth was just 0.1%.
At a time of high inflation, I see that essentially flat revenue growth as being a decline in real terms. The company also reduced its global retail sales growth outlook for the coming two to three years, from 6%–10% to 4%–8%.
I still think that is a solid growth rate if it can be hit. But a cut in the medium-term outlook signals that the US Domino’s is feeling more pessimistic about demand trends than it did a few months ago. I presume at least some of that is based on what it is already seeing day to day in its business.
On top of that, revenue growth is not necessarily difficult to achieve for a business like the US Domino’s. It can simply open more stores. Last year, for example, it added more than 1,000 to its network. The bigger worry for me is profitability. If sales growth is slowing and consumers are more hesitant to spend, there will be pressure to compete on price. That might help sales volumes, but at the cost of profit margins.
Across the pond
While the UK business is separate altogether, I reckon if the excellently run US business is lowering growth forecasts, the outlook on this side of the pond must be getting gloomier too.
The company’s last trading update was in November. At that point, like-for-like system sales showed 2.4% year-on-year growth for the third quarter. But orders were a bit lower than in the prior year period (price rises can explain why sales rise but orders fall). However, I think there may be tougher times ahead for takeaway food demand. That could hurt sales and profits at Domino’s.
It might grow by taking market share from competitors. I also like its strong brand, extensive network, and proven operational capability. In fact I think the business has a lot of attractive characteristics.
But with the demand outlook uncertain in the medium term, I do not regard the current Domino’s Pizza share price as good value. I will not be buying it for my portfolio.
The post Is the Domino’s Pizza share price tasty? appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Domino’s Pizza Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
