Beef, making up 8 per cent of inputs, has fallen in price by about 23 per cent from the highs of late last year. Wheat accounts for 8 per cent of inputs, and prices have come off about 14 per cent since May. Macquarie’s number-crunching outlines that cheese accounts for 25 per cent of Domino’s inputs and that block cheese prices are now stabilising, albeit at higher than long-term averages.
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On the plus side for investors, there are some signs of moderation in the ingredients which go into pizzas and other menu items. But because inflation is in the spotlight across the economy and at the forefront of the consumer mindset, this may mitigate any backlash. Macquarie said Domino’s is beginning to push through menu price changes which cause some risks in customers potentially baulking at the higher prices.
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“Restaurant operators bear the full brunt of rising inflation, while franchisors are more insulated as franchise fees are based on revenue, not profit,” Macquarie said.īut falling franchisee profitability does lower the pace of new store growth, which is a key driver of the Domino’s business. However, Macquarie points out that Domino’s Pizza is a master franchisor and therefore is in a better position to absorb inflation than a rival such as the ASX-listed Collins Foods, which runs 264 KFC fast food outlets in Australia and 62 across the Netherlands and Germany. “Despite resilient demand, menu price increases are not keeping up with inflation, putting pressure on margins in the near term”.
“Ultimately we continue to believe in the longer-term growth targets for the group,” Curran says.īut there may be some more downside risk to profit margins. Macquarie says Domino’s is a “resilient” business. UBS analyst Shaun Cousins has a “buy” rating on the stock and a 12-month share price target of $78. He says the outlook is improving, there is some tentative easing in European energy costs, and upside in its Asian operations. Jarden analyst Ben Gilbert is more optimistic and has a 12-month price target of $80 on the stock and an “overweight” rating. Macquarie analyst Ross Curran thinks there’s still more pain to come and has an “underperform” rating on the stock and a 12-month price target of $60.īut Macquarie recognises Domino’s is a strong brand that should be able to make a recovery over the longer term. Investors are trying to predict when the margin pressure may start to subside, but on the plus side they are also factoring in that during tougher economic times fast food chains step up their “value” offerings targeted at households feeling the pinch from higher cost-of-living expenses and rising interest rates as central banks attempt to arrest inflation.
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