Domino's stock may soon return to growth

2024 has been a tough year for the Domino's Pizza (ASX: DPM) share price, with the share price down around 35% year to date to $38.35, mainly due to a one-day sell-off in mid-January when unfavourable trading updates spooked investors.

Indeed, the company's shares have benefited from pandemic-era demand, rising to nearly $162 in September 2021; the last time they reached that price level was in the summer of 2019, roughly five years ago.

But new seeds may be beginning to sprout.

Domino's trading status

Reporting results in mid-January marked the fourth downward profit revision in just three calendar years, with the company announcing it now expects provisional pre-tax profit for the first half to be between $87 million and $90 million.

Don Magee, who has been CEO for more than 20 years, also noted that “our previous guidance for fiscal year 24 performance, whether de facto or not, is no longer valid.”

When the results were released a month later, on February 21, the situation perhaps seemed less severe than the earlier market reaction had suggested. For reference, for the six months to 31 December 2023, the company returned to same-store sales growth, with the ANZ region achieving its highest growth in six years.

Overall, network sales increased by 8.8% to $2.14 billion and online sales increased by around 11.8%, but EBIT fell 5.3% compared to the first half of 2023 to $107.9 million.

“The fundamental strategy underlying our business remains unchanged – by getting closer to our customers we are able to provide hotter, fresher meals to them and reduce costs for our franchise partners,” Meiji said.

The CEO also said first-half profits were 22.8% higher than the previous six months, but 5.3% lower than the same period last year, while the company continues to push ahead with savings programs aimed at reaching around $50 million by the end of the financial year.

What's next for Domino's stock?

Domino's has released some significant updates on its corporate strategy over the past few months, including plans for growth in Europe where it believes it has a good chance of gaining more market share, and at least one investment bank appears to be considering the possibility that things could be improving.

Citi recently upgraded the stock to “buy” from “hold” with a $44.50 target price. “We came out of our European investor tour in France with a better understanding of why Domino's has struggled and are cautiously optimistic that a turnaround can happen in FY25,” analyst Sam Teiger told The Australian.

The investment bank also noted that excessive discounting may have hurt the brand's reputation, but that deals allowing third-party delivery through aggregator services could lead to increased volumes, and it believes the summer will see strong growth due to major events such as the Paris Olympics and Euro 2024.

But there are also macro risks to consider. In a recent report, Morgan Stanley analysts argued that the widespread use of weight loss and appetite suppressants like Ozempic could impact a variety of high-calorie food brands. Naturally, this includes pizza. In fact, the report specifically noted that “fast food restaurants with an emphasis on unhealthy foods, such as fried chicken and pizza, are at greater risk from a consumption perspective.”

Meanwhile, investors may be encouraged by the recent federal budget, which, combined with the prospect of lower interest rates, could put more disposable income in the pockets of Domino's Pizza customers.

Domino's Pizza may have struggled to pivot post-pandemic, but the future may look attractive.

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