Shares in pizza phenomenon Domino's Pizza Enterprises Ltd (ASX: DMP) are likely to enjoy a strong week after the fast food chain upgraded its profit guidance for financial year 2017 on the back of strong same-store sales growth partly driven by increased online ordering.
The group now expects earnings growth to be greater than 30% this financial year with same store sales in the Australia and New Zealand region expected to be up an impressive 12%-14% over the prior year.
These kind of growth rates are usually reserved for the hottest technology stocks not pizza merchants, with Domino's still thumping the competition in the Australia market, while the growth recipe is also delivering strong same-store sales growth in its new markets of France and Germany. The European markets also have the potential for gross profit margin expansion, which could help drive profits higher at double-digit rates for several years yet.
Driving the sales growth is the ability of the company to constantly reinvent its menu, mobile ordering, and other digital innovations that are helping it steal market share and thrash the competition. The only weak spot is the forecast for flat same-store sales growth in Japan, which is a market that has proven a relatively tough nut to crack.
One potential threat is the ability of the digital takeaway aggregators such as Delivery Hero, Menulog and Deliveroo to level the playing field, although as yet their popularity, promotional activity and discounting does not appear to be slowing the Domino's juggernaut.
Takeaway
The other big problem for investors is the nosebleed valuation with the stock at $69 selling for around 50x analysts' estimates for $1.39 in earnings per share over FY17. This looks expensive and the company will need to deliver on its European ambitions to justify the price tag even after factoring in today's profit upgrade.
For fast food fans I would prefer the belt busting potential of pizza, cake and donut business Retail Food Group Limited (ASX: RFG). It also has ambitious overseas expansion plans and a far more appetising valuation around just 17x trailing earnings with forecasts for 20% profit growth this financial year. Just today the AAP reported that the group's CEO is intent on ramping up the overseas expansion to build a network of more than 3,500 food outlets worldwide.
