Domino’s Serves Up Pizza With Technology

This story features DOMINO'S PIZZA ENTERPRISES LIMITED. For more info SHARE ANALYSIS: DMP

The company is included in ASX200, ASX300 and ALL-ORDS

Domino's Pizza continues to lead in digital innovation, showcasing to brokers improvements to its food delivery options.

– Online order growth high, owning consumer channels makes this more cost effective
– Digital-led improvements include ordering from anywhere, personalised menus, social apps and bill splitting
-Stronger competitive offerings emerging
 

By Eva Brocklehurst

Domino's Pizza ((DMP)) continues to grow its share of the takeaway food market, as a prime mover in Australasia offering customers the convenience of fast and relatively affordable food.

The company held a presentation day to showcase improvements and a focus on selling its food profitably. The emphasis is on continued differentiation through robots, technology and rostering as well as such quirks as drones, pick-up hot lockers and GPS tracking.

The showcase at the Brisbane head office featured the company's "Luv Lab" development kitchen. While there was little hard news the presentation was a reminder to Deutsche Bank that the company is staying ahead of the curve on technology and continues to make it easier for customers to purchase their pizzas.

Technology

Already implemented in the Netherlands, Australian customers will soon be able to select a location from a position on the map and have their pizza delivered. Pick-up hot lockers will also be trialed in stores before the end of the year. The company's rostering system, already in place in Australia,will now be rolled out to Germany.

Operations 360, a benchmarking tool, also allows the company to assess the performance of franchisees across a number of metrics and potentially help to improve operations and profitability. This is all expected to make ordering simpler delivery faster and, as hopefully suggested by CLSA, better-tasting pizza.

The broker likes the deliberate focus on selling food more profitably and expects the company to deliver its FY25 target of 4,650 stores. This should deliver strong earnings growth over a multi-year period. CLSA, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Buy rating and $62 target.

Morgan Stanley cites some of the digital-led improvements include ordering from anywhere, personalised menus, social apps and bill splitting. While not individually game changing, together all the initiatives could be very powerful in the broker's opinion.

The company continues to build its investment in drones and driverless delivery technology while robotic delivery has been expanded to Germany. Morgan Stanley expects voice ordering using AI technology will soon be available on external devices like Google Home.

There was no trading update but the broker expects the strong performance in July has continued into August and September. Ord Minnett agrees digital remains the key point of differentiation for Domino's Pizza. Online order growth remains high and having its own channels to the consumer makes this more cost effective.

Goldman Sachs is also positive about the depth and thought behind the company's digital initiatives but remains cautious on the outlook given the emergence of a stronger competitor set following the launch of food aggregator platforms such as UberEats.

UberEats, in 2017, has partnered with McDonald's to deliver the burger chain's menu to Australian households. The broker, not one of the eight monitored daily on the database, retains a Neutral rating and awaits more positive signals from the download patterns of the company's core digital app. Target is $45.43.

Industrial Relations

A chart was provided which Deutsche Bank notes showed beverage incidents had increased 2.4% since the transition to Pepsi from Coke, although it was not clear a seasonal factors had some impact, or if overall customer volumes were affected.

Overall, the broker still envisages downside risk for the business given a view that the franchisees' share of the profit pool is falling and that could become a bigger issue when Australian sales growth slows and higher wages come through.

There was no update on the company's enterprise agreement but there is still a hearing in November to challenge the current agreement. The company has highlighted a total of $1.25m in underpaid wages has been recovered after completing 322 store audits and expects the process to be completed by December.

Morgan Stanley suspects the conclusion of the audit will remove an overhang for the stock. The broker continues to be confident in the business, with the briefing providing greater confidence that the model is thriving and it management depth is strong. While many companies that deliver weaker-than-expected earnings tend to pull back on growth initiatives this does not appear to be the case for Domino's Pizza.

There are three Buy ratings, two Hold and two Sell on the database. The consensus target is $46.54, suggesting 1.9% upside to the last share price. Targets range from $38 (Deutsche Bank) to $60 (UBS).

See also, Domino's Pizza Valuation Puzzles Brokers on September 18 2017.
 

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