Why Goldman Sachs Thinks Domino's Pizza Is Cooling Off

Domino’s Pizza Inc. (NYSE: DPZ) has been a huge beneficiary of the reopening trade as one of the top restaurant stocks. Offering a food delivery service over the course of the pandemic was great insulation for the business and maintaining its revenue stream, but with reopening underway comparable sales might not be favorable, at least according to Goldman Sachs.

Goldman Sachs downgraded the shares to Neutral from Outperform but reiterated a $450 price target, which implies upside of about 7% from the most recent closing price of $420.90.

For the bull case, the investment house believes there could be more upside as a result of continued momentum in same-store sales (SSS), significant acceleration in unit growth, and better-than-expected international SSS/unit growth. Risks to the downside include third part pressure on domestic SSS, franchisee top-line growth and margins and a significant increase in competitor activity.

Domino’s reported high-teens SSS trends beginning in the second quarter of 2020 as the pandemic forced consumers to shift behavior to off-premise dining. Pizza delivery was a clear beneficiary, and now the company is up against lapping these strong results. While Goldman Sachs continues to believe in the long-term story for the stock, the firm also recognizes that the challenging comps (which likely drive negative SSS trends) coupled with the recent share performance makes for a more challenging setup from here.

In the report, Goldman Sachs said that it continues to believe in the long-term story for Domino’s and see the company’s strong technology ecosystem and industry-leading franchise unit economics as supportive of the long-term algorithm for 6% to 8% unit growth and 8% to 10% systemwide sales growth. The firm sees the risk/reward more fairly balanced at current valuation levels, especially with challenging SSS laps ahead.

Goldman Sachs further detailed:

2020 was a banner year for Domino’s as consumers’ purchasing habits shifted (almost entirely) to off-premise dining, which drove Domino’s franchisees to see another year of record unit level profitability. Domino’s franchisees achieved ~$177K in EBITDA on average per store in 2020 (+24% yoy). While these strong results continue to support the longer-term opportunity for Domino’s to continue to drive unit development, challenging SSS compares that ramp in 2Q21, and through the balance of the year, could drive increased levels of volatility for Domino’s shares in the near term.

Domino’s Pizza stock traded down about 1% on Tuesday, at $415.86 in a 52-week range of $319.71 to $447.50. The consensus price target is $437.79.

Sponsored: Tips for Investing

A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.