The Fairfax media is reporting that one of the reasons behind the slump in Domino's Pizza Enterprises Ltd (ASX: DMP) shares over the past month is the likelihood that the group's franchisees will be forced to lift wages for their low-paid workers.
It has been reported that the group has already introduced a 10% surcharge onto the cost of Sunday pizzas in an attempt to protect margins, after being forced to raise wages for staff working on Sundays.
The group also reportedly still has to negotiate a new collective pay deal with the fast food workers' union that could result in rising costs for its fast-growing Australian operations.
The group's same-store sales growth in Australia for the 16 weeks to October 23 2016 was up a whopping 17.7% over the prior corresponding period, with online sales growth up 37%.
For financial year 2017 net profit is expected to be up 30% with analysts' forecasts for earnings per share of $1.40 matching the company's forecasts for profit growth.
Still even after the large share price falls over the course of 2017 the pizza maker still trades on around 43x estimated earnings at $60.43.
This looks an expensive price to pay for a business that will be relying on producing more strong growth by lifting its earnings margins across its Australian and European operations in particular. Rising wage costs over the second half of financial year 2017 in Australia look like a negative for a business that has enjoyed stunning success across the Australian fast food sector over the past few years.
Domino's shares are now coming back to a more sensible valuation from levels above $80 just a few months ago, although even at $60 the stock looks expensive given the likelihood that its very best days are behind it.
In the fast food space I would prefer the more attractively valued Collins Food Group Limited (ASX: CKF) or Retail Food Group Limited (ASX: RFG). Both of these businesses also pay attractive dividends with potential to grow organically and via new store counts in Australia or overseas.
