Domino’s Pizza Shares Plunge on Lower Profits But Analysts Optimistic on Outlook; Target Price $435
Domino's Pizza, the world's largest pizza company by global retail sales, reported that global retail sales rose 14.4% in the third quarter and sales in the same store in the US rose 17.5% as consumers ordered more pizza during the COVID. 19 pandemic, but weaker than expected gains pushed stocks down by over 10% in the last two trading days of the previous week.
The world's largest pizza chain announced that its sales grew by $ 146.9 million, or 17.9%, in the third quarter of 2020. This increase was mainly due to higher US retail sales, driven by sales growth in the same store and an increase in store counts during the fiscal year after four quarters resulting in a higher supply chain, higher sales of US franchise and US Led corporate business.
“We anticipate the brand's strong sales performance will continue as consumers continue to be interested in Domino's menu innovation, value proposition and strong digital ordering infrastructure (still 75% of sales). We are increasing our domestic sales in the same quarter from 10% to 14% versus 8% Consensus Metrix in Q4 20 and remain above consensus at 2.2% versus 1.8% consensus in 2021, "said Andrew M. Charles, Cowen and Company equity analyst.
“We anticipate the strength of US and international companies to continue while the increased supply chain and branch costs will be temporary. Mgmt is reviewing past targets for 25,000 stores by 2025, an issue that is temporal as the target was set before the COVID rather than the Capability which is causing some controversy. However, we believe this is an opportunity for DPZ to provide the $ 327 million buyback authorization. "
However, Domino's diluted earnings per share were $ 2.49 for the third quarter of 2020, below market expectation of $ 2.79 but better than $ 2.05 for the year-ago quarter. That unexpectedly low profit was mainly due to costs associated with the pandemic - general and administrative expenses increased 9.5% and raw material costs also increased 3.8%.
As a result, Domino shares fell over 10% in the last two trading days of the previous week. Domino's Pizza stock closed Friday 2.5% to $ 390.95. However, the stock is up over 30% so far this year.
Domino's net income increased $ 12.8 million, or 14.8%, for the third quarter of 2020. This increase was primarily driven by higher operating income driven by higher U.S. franchise revenues as well as higher supply chain volumes, which were partially offset by higher variable compensation costs as well as COVID-related costs, including additional compensation and increased sick pay for front workers.
Domino's Pizza share forecast
25 analysts are forecasting the average price in 12 months at $ 435.32 with a high forecast of $ 500.00 and a low forecast of $ 380.00. The average target price corresponds to an increase of 11.35% over the last price of USD 390.95. Of these 25, 16 analysts rated “Buy”, nine “Hold” and none “Sell”, according to Tipranks.
Morgan Stanley's price target is $ 446, with a high of $ 575 in a bull scenario and $ 318 in a worst case scenario. On Domino's Pizza, Barclays lowered its price target from $ 345 to $ 390. Cfra has upgraded its shares from a hold rating to a buy rating and raised its price target for the company from $ 400 in July to $ 450.
Other equity analysts recently updated their equity outlook. Robert W. Baird raised his target price from $ 440 to $ 450 and rated the company as outperforming. Longbow Research confirmed a buy recommendation and issued a price of $ 441. Eventually, Jefferies Financial Group raised its target price from $ 385 to $ 405 and gave the stock a hold rating.
“Weaker than expected, a short-term setback is flowing through a strong sales quarter, but the costs are likely to be temporary. Unit growth has been slowed by closings, COVID-19, but this, too, is likely to be temporary. Slightly lower 20/21 to reflect these properties; rolling target price at $ 22 and largely unchanged at $ 446, "said John Glass, Morgan Stanley equity analyst.
“Delivery momentum supports world-class system sales and unit growth in a still fragmented category; advantageous category in 2020 with Covid-19 disorder. Well positioned in important US markets: technology leadership, data-driven investment and marketing decisions are trademarks. The implementation of the market means gradual growth. Sustainable competitive advantages over aggregators in terms of value, delivery speed, which could become more visible in years 20 and 21. Strong cash flow generation, stable franchise revenue streams and international business are partially offset by a competitively priced category and high leverage, ”added Glass.
Upward and downward risks
Pros: 1) SSS growth is returning to historic levels as DPZ wins against the competition. 2) Strong international sales as EMs gain importance. 3) Delivery aggregator pressure fading. 4) Faster COVID-19 recovery, bigger stock gains / unit growth - highlighted by Morgan Stanley.
Disadvantage: 1) Irrational aggregator discounting remains. 2) key markets fall into economic recessions; larger COVID-19 impacts (also on the cost side). 3) Domestic Fortress cannibalizes sales.
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This article was originally published on FX Empire
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