Domino's Pizza Enterprises (ASX:DMP) jumped as much as 7.3% to a seven-week high of A$15.55 in what traders flagged as a short squeeze, following stronger-than-expected quarterly results from US-listed Domino’s Pizza Inc (NASDAQ: DPZ). At close of trade, it was sitting at $15.19, up 3.4%.
Citi’s Sam Teeger, however, isn’t shifting his stance on the Australian business despite DPZ’s beat. “Despite DPZ beating 3Q expectations overnight, this appears to be largely driven by the US business, and we have seen little to make us incrementally more positive on Sell-rated DMP,” he said.
Teeger continues to see risks to DMP’s growth outlook: franchisee profitability remains below levels needed to spur new store openings; the pivot from heavy discounting to “everyday value” could dent sales if customers have been conditioned to buy on promotion, exacerbating operating deleverage for franchisees; and ongoing cost-outs lack a numeric target, heightening earnings risk and potential disruption at the franchisee level. While guidance may emerge at the AGM on 12 November, Teeger also cites the absence of a permanent CEO and a debt-heavy balance sheet as reasons to stay cautious.
Near term, he notes the stock could still trade well given short interest above 13% and the likelihood of no fresh negatives at next month’s AGM. Citi retains a Sell rating and A$13.25 target price.
DMP touched a 17-year low of A$13.11 earlier this month. The shares were last up 2.5% at A$15.04.