Is the Domino’s Pizza share price tasty?

Have shares in London-listed Domino’s Pizza Group (LSE: DOM) has not been a worthwhile option lately. The change in the share price of Domino’s Pizza for this week is 18%. That means it is now 24% below last year.

I think there is a clear reason for this – and fear that the stock could still go down from here.

An anxious request

When there is a recession, experts go into overdrive discussing what it means for certain products. One theory is that lipstick sales are on the rise, as consumers value small luxuries over larger ones.

A more intuitive theory is that cash-strapped consumers cut down on non-essential expenses. They eat out less and choose to eat less at home. But what about the type of food served by Domino’s? If demand falls, it could hurt Domino’s stock price.

An unsettling US trend

One clue came this week from a New York listing Domino’s Pizza (NYSE: DPZ) (a different company from the UK company that has a local franchise). Same-store sales in the US grew by less than 1% last year. In international division company terms (which excludes UK-listed Domino), year-on-year growth was just 0.1%.

In times of high inflation, I see that revenue growth is essentially flat as the population declines in real terms. The company also lowered its outlook for global retail sales growth over the next two to three years, from 6%-10% to 4%-8%.

I still think that the growth rate is hindered if it can be hit. But the cut in the medium-term outlook signals that US Domino’s is feeling more pessimistic about demand trends than it has in recent months. I’m assuming at least some of that is based on what I’ve seen every day in my business.

On top of that, revenue growth is not always difficult to achieve for a business like US Domino. It can only open another store. Last year, for example, added more than 1,000 to the network. The bigger concern for me is profit. If sales growth slows and consumers are more hesitant to spend, there will be pressure to compete on price. That can help sales volume, but at the expense of profit margin.

Across the pond

While the UK business is entirely separate, I think that the excellent US business has lowered the growth forecast, the outlook on this side of the pond is also bleak.

The company’s last trading update was in November. At the time, system sales seemed to show 2.4% year-over-year growth for the third quarter. But orders are lower than in the previous year’s period (the rise in prices may explain why sales are up but orders are down). However, I think there may be more difficult times for food demand. That could hurt Domino’s sales and profits.

It can grow by taking market share from competitors. I also like their strong brand, extensive network, and proven operational capabilities. In fact, my business has many attractive features.

But with demand prospects uncertain in the medium term, I don’t think Domino’s Pizza’s current share price is a good value. I wouldn’t buy it for my portfolio.