Domino's sets out bullish growth targets

Domino's (DOM) shares were marked down as it disclosed that a tough start to the year means that first-quarter orders and like-for-like sales growth are likely to go backwards, but the pizza delivery merchant confirmed bullish new growth targets and acquired a franchisee at a nice valuation after delivering a solid uptick in annual revenue and profit. 

Hungry customers are turning to the dough roller in greater numbers, despite its often-discussed pricing levels, as total order numbers rose 1 per cent. While collections were up 13 per cent, deliveries are still under pressure and contracted by 5 per cent. 

Underlying cash profit of £138mn was at the top end of Domino's guidance range, while its share of the UK takeaway market rose from 7.1 to 7.2 per cent. 

New growth targets indicate a significant increase in stores and sales. Management expects to have more than 1,600 UK and Ireland stores by 2028, and more than 2,000 by 2030, with system sales forecast to hit £2bn and then £2.5bn in these years. According to broker Liberum, this represents store estate growth of 21 per cent and 52 per cent, respectively, over the next five and 10-year periods. 

The market-leading position and growth plans leave Domino's well-placed, with competitor Papa Johns set to close 50 UK sites in the second quarter. 

Elsewhere, Domino's has bought the 85 per cent it didn't already own in its biggest franchisee in the Republic of Ireland and Northern Ireland (Shorecal) for £62mn. While the consideration represents an attractive eight times cash profits, the fact that around 40 per cent of the deal will be funded through issuing shares could have irked investors. 

The shares are valued at 18 times forward consensus earnings, which we think fully bakes in the outlook as things stand. Hold. 

Last IC view: Hold, 377p, 1 Aug 2023