Domino's Pizza Enterprises Faces Declining ROCE and Asset Base, Warning Signs for Investors

Domino's Pizza Enterprises (ASX:DMP) may be at risk of shrinking as a company due to a declining return on capital employed (ROCE) and a declining base of capital employed. ROCE measures the return generated from capital employed in a business, and Domino's Pizza Enterprises has an ROCE of 8.1%, which is lower than the industry average of 8.7%. The ROCE has been trending downwards over the past five years, and the company is utilizing the same amount of capital as it was back then. This suggests that the business is mature and hasn't had much growth in the last five years, which may make it challenging to create a multi-bagger.

Domino's Pizza Enterprises (ASX: DMP) has been a dominant player in the pizza market for decades, but recent financial indicators suggest a potential slowdown in its growth trajectory. The company's return on capital employed (ROCE), a key metric for evaluating a company's efficiency in generating profits from its capital investments, has been trending downward over the past five years. As of the latest available data, Domino's Pizza Enterprises has an ROCE of 8.1%, which is below the industry average of 8.7% [1].

The decline in ROCE, coupled with the fact that the company has not increased its capital employed over the same period, indicates a maturing business model. This suggests that Domino's Pizza Enterprises has not been able to generate significant growth in recent years, which could make it challenging to achieve substantial future growth, often referred to as a "multi-bagger."

The company's market share gains and impressive execution in recent years have helped it avoid significant stock price declines, unlike some of its competitors. However, the challenges in the pizza market, exacerbated by the rise of third-party delivery platforms, are significant enough to cause concern among investors. The market has stagnated, with Domino's expected to grow same-store sales by about 7% over a four-year period, which is below inflation [1].

Moreover, the company's lower-income cohort has shown weakness, although there was a rebound in the second quarter of 2024. The increasing competition in the pizza market, both domestically and internationally, is a significant factor contributing to the slowdown in growth. Domino's Pizza Enterprises' stock has traded sideways over the last few years, a relative success compared to some of its competitors, but the challenges in the pizza market are substantial enough that even impressive execution may not be enough to sustain growth in the future.

Investors are increasingly looking at the company's potential to diversify its offerings, with some analysts suggesting that Domino's Pizza Enterprises might consider more aggressive expansion into the fast-growing chicken category. However, the company's current focus remains on maintaining its dominant position in the pizza market.

In conclusion, while Domino's Pizza Enterprises has shown resilience and impressive execution in recent years, the declining ROCE and the stagnant market present significant challenges. Investors will need to closely monitor the company's ability to adapt to these challenges and sustain growth in the future.

References:
[1] https://foodinstitute.com/test-site/focus/for-dominos-pizza-has-become-a-problem/