Domino’s 1H24 result revealed mixed information. Same store sales growth momentum has improved early in 2H24e and is an encouraging sign. However, the underlying cost growth for the business looks elevated and franchisee profitability is well below levels that will reignite store openings. While earnings may have troughed, we expect an acceleration in store growth is two years away given such low franchisee profitability.

Domino’s company needs to clarify key issues in our view before a positive stance can be taken. We are looking for answers on whether Japan needs to pause store rollouts, the trajectory of sales in Europe and discounting intensity in Australia. There is a wide range of potential outcomes, ranging from whether Domino’s can quickly reignite store growth and pizza volumes or, more likely, store rollout struggles for another three years. Domino’s will release results on 21 February 2024.

We initiate coverage of footwear and apparel retailer Accent Group. The company has store rollout potential to grow by 240 stores in four years, or a 6.6% CAGR. Moreover, the evolving product mix contributes to higher gross margins as more vertically sourced product and more higher margin apparel goods are sold. However, the company is facing rising cost of doing business coupled with a period of slowing same store sales which puts pressure on margins in FY24e. The store network growth potential and gross margin gains will help lift margins in FY25e and more so in FY26e.

Domino’s reported network sales down 4% and EBIT down 21% in 1H23. The worrying sign near-term is weak same store sales growth (SSSg) trends persisted into 2H23e and the company has seen a volume reaction to its price rises, limiting its much-needed improvement in system profitability. Our primary concern is the deterioration of franchisee profitability which is trending 30% below recent peaks and at a level that will discourage new store openings.

While JB Hi-Fi had a record half of earnings in 1H23, that is in the rear-vision mirror. The forward trajectory suggests a normalisation of sales and earnings is imminent. We expect negative comp sales in 2H23e and 1H24e for both JB Hi-Fi Australia and The Good Guys. We expect gains from inflation, and The Good Guys improved buying terms.

Domino’s AGM update gave some positive signs about sales trends improving, but also solidified concerns about the challenge in raising prices to cover higher costs. The company is planning for a much better 2H23e, which looks difficult to achieve in our view, particularly given franchisee profitability is falling.

Domino’s “rebasing” of sales is only one of the challenges facing the company over the next two years in our view. The company and franchisees face higher costs and store rollout could slow. The cost pressures that have built in the past six months are likely to lead to some margin pain for Domino’s as it preferences store rollout and market share growth.

We initiate coverage of Harvey Norman. The company’s earnings have benefited from elevated demand and tight cost controls over 2020 and 2021. Earnings will fall over the next three years, but we expect margins to remain higher than pre-COVID-19 levels given market structure, store rollout and cost management. In Australia, we expect margins to remain firm given the more concentrated market structure, tight product supply and stringent control on costs the company has maintained over the past two years. The company’s sprawling retail network overseas now accounts for one-quarter of its group earnings and with further rollout in each major country, its share of earnings will rise over the next three years. Offshore stores will rise from 107 today to 121 by FY24e.