After less than a year at the helm, Domino’s (ASX: DMP) CEO Mark van Dyck is stepping down. No trading update was provided and uncertainty on leadership and strategy sent the shares down 16%. During his tenure, van Dyck closed loss-making stores, but didn’t deliver the much-awaited strategic update.

Why it matters: Uncertainty is now likely to weigh for longer. Chairman Jack Cowin is filling in as executive chairman while searching for a new CEO. Cowin, of Burger King’s Australian franchise, Hungry Jacks, is a fast-food veteran. A strategic update is unlikely until a permanent CEO is found.

  • We anticipate a prolonged turnaround to delay the global network expansion and expect a lower ultimate store count. We now forecast Domino’s to reach 5,400 stores by fiscal 2034, down 7% from our previous estimate of 5,800 stores. This equates to a compound annual growth rate for stores of 4%.
  • We also expect operational improvements to take longer now, especially in the troubled Japanese and French markets. We don’t expect group EBIT margins to improve until fiscal 2027 and temper our midcycle EBIT margin forecast to 8%, from 9% previously, as a percentage of network sales.

The bottom line: We cut our fair value estimate for narrow-moat Domino’s by 21% to AUD 46. While the growth story has stalled, significant expansion opportunities remain in Europe and Asia. We believe the market is losing faith in this growth potential, leaving shares materially undervalued.

  • We think the shares now price in no new stores and flat EBIT margins at fiscal 2024 levels of 5% in the future. In this scenario, only like-for-like sales growth drives a 10-year EPS CAGR of 4% to fiscal 2034. This extrapolates a tough period for Domino’s and fast food into perpetuity, in our view.

Between the lines: Separately, Domino’s says it’s unaware of any information that adjusted NPAT for fiscal 2025 is likely to materially differ from consensus. Our AUD 1.30 fiscal 2025 EPS estimate is in line with FactSet consensus.

Business strategy and outlook

Domino’s Pizza Enterprises is the Australian master licence holder of the Domino’s Pizza brand. It also has operations in New Zealand, Japan, Singapore, Malaysia, France, Germany, Belgium, Luxembourg, Taiwan, Cambodia, and the Netherlands. The stock suits investors seeking exposure to the food and beverage sector. Management is active, importing marketing strategies from the United States, or creating new ones, and applying them to local trends in individual markets. Management has adapted to market trends by refreshing the product range, including healthier ingredients and gourmet styles, and transitioning to online ordering.

As a master franchisee, Domino’s has limited capital requirements, which means royalty payments it receives in the future should continue to be paid as partially franked dividends. This makes returns on invested capital very attractive. Brand and scale are key competitive advantages warranting a narrow economic moat rating, and future growth prospects are significant. Despite significant growth during recent years, Domino’s is by no means a mature business. Australia can still increase its store base by about one-fifth in the next few years, and European growth is much more substantial, with the potential to add two-thirds to the existing store base to around 2,200 outlets during the next decade.

Risks include a change in consumer taste for pizza as a food category and growth execution risk, particularly with differences between Australian, Asian, and European business environments. Good management can navigate these changes. McDonald’s modified its menu in response to an increasingly health-conscious society; we see this as a perfect example of a food business changing with the times.

Bulls say

  • Domino’s is a highly visible brand based on a successful US business model. Across Domino’s three regions, sales have increased at a CAGR of 8% over the past five years. We expect a network sales CAGR in the high single digits over the next five years.
  • The pizza market in Europe is highly fragmented, presenting significant opportunity for Domino’s to take market share with an attractive value proposition, increased convenience to the customer, and a differentiated product offering.
  • The company’s large network size has positive implications for discounted supplier arrangements.

Bears say

  • There is a high level of competition, stemming from independent pizza stores and other quick-service restaurants.
  • The company might evaluate its target markets in new countries incorrectly, given the geographical Get Morningstar insights to your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.distance and cultural variances.

  • The low-price business model may still be affected by slowing retail and discretionary spending.