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Own shares in London listed companies Dominos Pizza Cluster (LSE:DOM) hasn’t been a rewarding choice of late. Domino’s Pizza’s stock price has fallen about 18% in recent weeks. That means they are now 24% below where they were a year ago.
I think there is an obvious reason for this, and I fear that the stock could still go down from here.
Lawsuit Concerns
When there’s a recession, experts go into overdrive discussing what it means for specific products. One theory is that lipstick sales increase as consumers indulge in little luxuries instead of big ones.
A more intuitive theory is that cash-strapped consumers reduce non-essential spending. They dine out less and instead opt to eat cheaper at home. But what about the kind of specialty takeout at Domino’s? If demand falls, that could affect Domino’s share price.
disturbing American trend
This week came a tip from listed companies in New York. Dominos Pizza (NYSE: DPZ) (a different company than the British one that has the local franchise). Its same-store sales in the US grew less than 1% last year. In what the company calls its international division (which excludes UK-listed Domino’s), year-on-year growth was just 0.1%.
At a time of high inflation, I see income growth as essentially flat as a decline in real terms. The company also lowered its outlook for global retail sales growth for the next two to three years, from 6% to 10% to 4% to 8%.
I still think that’s a solid growth rate if it can be achieved. But a cut in the medium-term outlook indicates Domino’s US is feeling more pessimistic about demand trends than it was a few months ago. I guess at least some of that is based on what you’re already seeing on a day-to-day basis in your business.
On top of that, revenue growth isn’t necessarily hard to achieve for a company like US-based Domino’s. You can simply open more stores. Last year, for example, it added more than 1,000 to its network. The biggest concern for me is profitability. If sales growth is slowing and consumers are more hesitant to spend, there will be pressure to compete on price. That could help sales volumes, but at the cost of profit margins.
across the pond
While the UK business is completely separate, I think if the excellently run US business is lowering growth forecasts, the outlook on this side of the pond must also be bleaker.
The company’s last business update was in November. At that time, comparable systems sales showed year-over-year growth of 2.4% in the third quarter. But orders were slightly lower than in the prior-year period (price increases may explain why sales are up but orders are down). However, I believe tougher times are ahead for takeout demand. That could affect Domino’s sales and profits.
It could grow by taking market share from competitors. I also like their strong brand, wide network, and proven operational capability. In fact, I think the business has many attractive features.
However, with the demand outlook uncertain over the medium term, I don’t think Domino’s Pizza’s current stock price is a good value. I will not buy it for my portfolio.
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