Could buying Domino’s shares at under $55 make me rich?

Young couple having pizza on lunch break at workplace.Young couple having pizza on lunch break at workplace.

The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price has dropped by around 70% since September 2021. Does this represent an opportunity to make piping-hot returns over the next few years?

Before we answer that question, let’s take a quick look at what’s been going on for the pizza maker over the last couple of years.

It’s somewhat understandable that the Domino’s share price has plunged over the past 20 or so months.

When pandemic-induced lockdowns took effect in early 2020, many food retailers, like cafes and restaurants, were forced to close completely or trade with restrictions. This provided Domino’s with an opportunity to feed loads more hungry people across Australia, New Zealand, Europe, and Japan who had limited dine-in and take-away food options. The locked-down periods saw Domino’s deliver substantial sales growth.

But now that all the cafes and restaurants are open again and inflation is biting, Domino’s isn’t seeing much, if any, sales growth. The first few weeks of the second half of FY23 showed a decline in same-store sales of 2.2%.

Rising food and wage costs have also significantly pressured the company’s profit margins.

In response, Domino’s lifted its prices to help protect franchisee profitability. While this helped unit economics, it led to reduced ordering frequency by customers, which meant that trading for the month of December was “significantly” below expectations, according to Domino’s CEO and managing director, Don Meij.

The company is now working on balancing the ‘value equation’ for customers.

Are Domino’s shares an opportunity?

If Domino’s shares could recover to $100, this would still be around 38% below the peak seen on 10 September 2021. But, from the current price, it would represent returns of around 100%. That would be a very solid gain.

What factors could help deliver that sort of return?

If Domino’s can deliver on two of its key goals, then I believe the company’s share price could well double over the next three or so years.

Domino’s has an annual same-store sales growth target of 3% to 6%, and annual new store openings of between 8% and 10% of the store network. Domino’s had been hitting those targets in earlier financial years. It doesn’t expect to achieve those numbers this year but aims to return to these targets in the “medium term”.

It’s looking to return to same-store sales growth – after reporting a decline of 2.2% in its latest half-year update – by balancing the “value equation” for customers. It said it was testing pricing and voucher initiatives.

Domino’s shares could also be boosted by its future store count goals. It’s aiming to reach 3,050 European stores by 2033, 1,200 ANZ stores between 2025 and 2028, and 3,000 Asian stores by 2033. This would be an almost-doubling of Domino’s locations by 2033. The company also continues to look for acquisitions.

Based on estimates on Commsec, the business is trading at 22 times FY25’s estimated earnings.

If Domino’s can return to its goals of mid-single-digit, same-store sales growth annually (in percentage terms) and high-single-digit annual growth (in percentage terms) of its store network, then I think Domino’s shares could well be a helpful boost to an investor’s wealth.

But, I expect the company’s profit growth in the 2020s will be slower than the 2010s because it’s now a much larger business. It’s harder to keep growing a big business at a very strong pace because there are fewer locations to expand into.

The post Could buying Domino’s shares at under $55 make me rich? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Domino’s Pizza Enterprises. The Motley Fool Australia has recommended Domino’s Pizza Enterprises. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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