Domino's Pizza Enterprises Ltd.  

Reaffirmed NPAT guidance for 2018:  Domino's Pizza Enterprises Ltd. (ASX: DMP) had reaffirmed NPAT guidance for 2018 of growth of more than 20% due to menu innovation and operational improvements to Same Store Sales in all markets. The Network sales for the first half had increased 7.1% (+$82.8m) on the prior corresponding period to $1,248.9m, which is 4.0% growth on a Same Store Sales (SSS) basis. DMP for 2018 has updated SSS guidance for ANZ to growth in the range of 6-8% (down from +7-9%). SSS Guidance for Europe and Japan were reaffirmed at +6-8% and +0-2%, respectively. The FY18 Guidance on new store openings is between 310-330 for the Group, including Hallo Pizza conversions. Further, the company’s store count target is 4,650 stores by 2025, including 1,200 stores in ANZ, 2,600 throughout Europe and 850 stores in Japan.
 
In terms of stock performance, DMP stock has risen 28.41% in three months as on July 19, 2018, but is trading at a high P/E. Further, it has been targeted by short sellers quite often, and was down 2.8% on July 20, 2018. Group’s Return on Equity has been 25.4% as at July 2017 against 23.6% as at July 2016, which has been above industry median of 12.4%.
 
On the other hand, the group is vulnerable to structural risks. ANZ margins and store roll out plan are also exposed to risks while it has been speculated that many submissions have been made to the  franchising Parliamentary Inquiry by DMP’s franchisees and over-charge on food costs was highlighted among the key issues.
 

Network Sales (Source: Company Reports)
 
Additionally, the company’s US parent has reported weaker than expected result for the second quarter, which has subdued the sentiment of the investors globally. US parent had missed the estimate for the international sales and the comparable sales at international franchised stores grew 4.0% compared to expectations of 5.3%. This weaker than expected international sales impacted the ASX-listed stock that holds the rights to Australia, Japan and some regions of Europe. It is also estimated to contribute to 30% of the parent company’s (Domino’s Pizza International) sales. The investors are now concerned that company will miss the FY 18 projection also.
 
Based on the foregoing, we give an “Expensive” recommendation on the stock at the current price of $ 48.960.

 
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