Domino’s Pizza’s (ASX: DMP) global network sales declined 2% in the first half of fiscal 2026. Less discounting to boost franchisee margins is reducing sales volumes. But cost-cutting and normalizing marketing spending stopped profits from declining. Underlying EBIT rose 1% to $102 million. Shares fell 11%.

Why it matters: Like-for-like sales declining by 3% in the first half is tracking below our prior estimate of flat like-for-like sales in fiscal 2026 and 2027. Sales deteriorated further in recent months. The 7% decline in like-for-like sales in the first eight weeks of the second half weighed heavily on market sentiment.

  • However, the result was more mixed than the steep stock price decline might suggest. Positive aspects include a strengthening balance sheet, rising franchisee profitability to three-year highs, and the conclusion of its senior leadership refresh. The new CEO starts mid-2026.
  • Attractive store returns are key in incentivizing store openings, the linchpin to Domino’s growth story. By removing blanket discounts and sharing cost savings with franchisees, store economics are improving, up 4% on a rolling 12-month basis.

The bottom line: We maintain our $41 fair value estimate for narrow-moat Domino’s. We lower our revenue and EBIT estimates by 4% on average over the next decade, due to 4% lower network sales. But the time value of money offsets, with only an immaterial impact on our valuation. Shares are cheap.

  • Turning around sales momentum is likely a multiyear exercise, but we believe the market is too pessimistic on the long-term growth opportunity. We estimate shares are pricing in only a few, if any, store openings and only moderate EBIT margin recovery.

Key stats: The risk of an equity raising or a fire sale of noncore assets is diminishing. The net leverage stands at 2.2, down from 2.6 in June 2025, and closing in on management’s target of 2.0. The unfranked dividend per share of $0.25 is 55% lower year over year.

Losing customers is painful, but a stronger footing to grow is building

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 5% over the past five years. We expect a network sales CAGR in the midsingle digits over the next five years.
  • The pizza market in Europe is highly fragmented, presenting a 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 distance and cultural variances.
  • The low-price business model may still be affected by slowing retail and discretionary spending.

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.