Tumbling Domino effect

Franchisees seeking a bigger pizza the action

SHARES in Domino’s Pizza Enterprises have fallen again, plumbing fresh 12-month lows as investment bank Citi joins the legion of analysts turning bearish on the stock.

Citi has put a “sell” recommendation on shares in the pizza group, a former market darling.

In a note to the clients of the investment bank, Citi analyst Craig Woolford has set a price target of $45.50 on the stock – a long way from its price yesterday morning of $52.38.

Its shares hit a high of just under $77 last year.

Mr Woolford said the price of Domino’s shares to shrink to 23 times the group’s earnings per share, compared with a price-to-earnings ratio of 30 now.

Sales and earnings growth were also likely to slow, he said.

Mr Woolford warned Domino’s had taken its share of the profit pool as far as it could realistically go, with store franchise operators needing to pocket an equal share in earnings growth from here.

Mr Woolford’s reasons for his bearish view on Domino’s stem from an expected push back from franchise operators demanding a bigger slice of earnings, growth limitations in the Australian market and headwinds from its push into Europe.

The group’s target for its earnings before interest, tax, depreciation and amortisation margin would “not be met because Domino’s will need to provide more incentive for franchisees to join the network”, he said.

“Sales growth will slow, particularly in Australia as store splits dilute sales per store,” he said.

Renewed pressure would come from franchise operators who for years had seen Domino’s rake in double-digit profit growth, making investors incredibly rich through its rampaging share price and dividends, Mr Woolford said.

Those franchise operators would now want to share in that wealth, he said.

“Domino’s has enjoyed very strong profit growth, but the health of the franchisee is crucial to further success.

“Over the past 12 years, the average Australia/NZ Domino’s store has seen 1.2 per cent per annum growth in income – below CPI and in contrast to 9.5 per cent per annum growth for Domino’s. We expect profit growth to slow to 4.4 per cent per annum over the next nine years, reflecting a better balance in profits between franchisor and franchisee.”