Should you buy Domino’s Pizza Enterprises Limited (ASX: DMP) shares as a hedge against inflation?

Highlights

• Domino’s Pizza Enterprises Limited (ASX:DMP) shares have corrected nearly 9% in the last three trading sessions through Thursday (15 June 2023).
• Being in the consumer discretionary space, the company can pass on the inflationary impact on input cost to the end consumer without taking a big hit on sales volume and market share.
• DMP expects to deliver materially higher profitability in FY24 and beyond, supported by improvement of its core business.

Domino’s Pizza Enterprises Limited (ASX:DMP) is one of the largest franchisees of Domino's outside of the United States. The company holds the master franchise rights to Domino's brand and network in various countries. Being in the consumer discretionary space, the company can pass on the inflationary impact on input cost to the end consumer without taking a big hit on sales volume and market share.

However, over the last three trading sessions, the stock has corrected nearly 9% after the company announced a series of initiatives intended to deliver up to AUD 55 million in annualised cost savings by FY24. As part of a cost-cutting measure, DMP said it would close all of its 27 stores in Denmark, which have been making losses.

The company further said it would either franchise or close around 65 to 70 corporate-owned stores, which are not performing well. These stores represent around 2% of the company's 3,827 outlets worldwide.

DMP believes the above-mentioned strategic initiatives can help it improve its earnings before interest and tax (EBIT) by AUD 25-30 million in FY24, and in the following two years, it is expected to improve further. However, what is probably weighing on the stock is the company's forecast of AUD 80-90 million EBIT hit in FY23 because of non-recurring costs.

The company further said that due to slower than expected recovery in its weekly delivery orders, its EBIT growth in the second half of FY23 has not improved over first-half EBIT as expected earlier, weighing on its share price. Worth mentioning here is that in 1HFY23, DMP reported an EBIT of AUD 113.9 million on revenue of AUD 1,154.5 million. While its EBIT fell by 21.3%, its revenue declined by 4% annually in 1HFY23.

DMP expects to deliver materially higher profitability in FY24 and beyond, supported by improvement of its core business, higher sales, optimising the corporate store network, process to exit the loss-making Danish market by the end of FY23, and streamlining core operations.

DMP Share Price Performance

DMP shares closed 1.21% lower at AUD 42.620 apiece on Thursday. With today's loss, the stock has corrected nearly 15.50% in a month and nearly 36% year to date. The stock hit a 52-week high of AUD 76.950 on 1 Feb 2023 and a 52-week low of AUD 40.750 on 13 June 2023.

DMP Daily Technical Chart; Source: REFINITIV

Note 1: Past performance is neither an Indicator nor a guarantee of future performance.

Note 2: The reference date for all price data, and currency, is 15 June 2023. The reference data in this report has been partly sourced from REFINITIV.

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