Domino’s Pizza Inc. is likely to enter next year with its highest prices in more than a decade, and the company could raise them even more on some of its core offerings, an analyst said Monday.
The analyst, BTIG’s Peter Saleh, upgraded Domino’s Pizza to buy with a $460 price target, adding that the pizza delivery giant’s margins have bottomed and that issues with finding delivery drivers could be fading.
“We expect Domino’s to enter 2023 with the highest level of menu pricing in more than a decade, and expect management could take price on the $7.99 carryout offering, further bolstering sales and margins next year,” Saleh said in a research note Monday.
“We expect improvements in fundamentals in 2023 to translate into a resurgence in development in 2024, and in turn a higher share price, as the narrative shifts to bullish from bearish.”
Saleh also said same-store sales comparisons next year would be easier, after five straight quarters of declines in the company’s delivery segment. And he said he expected increased pricing on Domino’s Mix & Match deals.
Moreover, he said he believed Domino’s ingredient costs peaked in the second quarter and have since eased. He said Domino’s next year could see those costs rise in the low to single digits, which would be “more than offset by the mid- to high-single-digit pricing already in place, leading to an expansion in margins.”
Shares of Domino’s
slipped 0.8% to $379.04 on Monday.
After the pandemic’s delivery boom, Domino’s has faced questions over whether customers are feeling “pizza fatigue” — although BMO analysts downplayed that possibility. The company has had to pay more to attract drivers and other staff, and like other restaurants, has had to juggle rising costs for food. In October, Domino’s executives said they expected their prices to rise around 7% in the fourth quarter, following plans to bump its takeout Mix & Match deal to $6.99 from $5.99 during that month.
Rising food prices have stretched consumers and raised concerns about accessibility. But executives at some food producers and restaurants have said they still have leeway to charge more or keep prices elevated. Domino’s executives have said inflation will hit its delivery business differently than its takeout segment.
“We believe that inflation will impact delivery more than carryout due to the added expenses of fees and tips in that channel,” Chief Executive Russell Weiner said on the company’s earnings conference call in October. “Our research shows that a relatively higher delivery cost might lead some customers to prepare meals at home. This could be exacerbated as consumer spending becomes more constrained around the holiday.”
At least 26 analysts have ratings on Domino’s Pizza stock, according to FactSet. Of those, 14 have “hold” ratings on the stock.
Domino’s Pizza stock has tumbled some 33% so far this year. The S&P 500 Index
by comparison, is down 16% over that time.