ii view: Domino’s Pizza – a buying opportunity?

First-half results to 29 June

• System sales up 1% to £778 million
• Like-for-like system sales down 0.1%
• Adjusted pre-tax profit down 15% to £43.7 million
• Underlying profits (EBITDA) down 7% to £64 million
• Interim dividend up 2.9% to 3.6p per share
• Net debt up 7% from a year ago to £307 million

Guidance:

• Now expects full-year new store openings in the mid-20s, down from over 50
• Now expects full-year adjusted profit (EBITDA) of between £130-to-£140 million, down from a previous £146 million and 2024’s £143.4 million
• Now expects full-year capital expenditure of £22 million, down from a previous £25 million

Chief executive Andrew Rennie said: “Against a more difficult market backdrop, Domino’s is significantly increasing its market share by offering great value, innovative products and even faster delivery times. 

“There’s no getting away from the fact that the market has become tougher both for us and our franchisees, and that’s meant that the positive performance across the first four months didn’t continue into May and June. Given weaker consumer confidence, increased employment costs and uncertainty ahead of the Autumn Statement, franchisees are taking a more cautious approach to store openings for the time being.

“Despite these near-term challenges, we remain confident in our strategy and the prospects for our resilient, market-leading business. That confidence is demonstrated by our decision to increase the interim dividend, and we also continue to assess a range of accretive growth opportunities.”

ii round-up:

Domino's Pizza Group (LSE:DOM) holds the master franchise agreement to own, operate and franchise Domino’s stores in the UK and the Republic of Ireland.

It operates over 1,381 outlets across the two nations.

For a round-up of these latest results announced on 5 August, please click here. 

ii view:

The FTSE-250 listed company opened its first UK store in Luton in 1985. Today, Domino’s delivers more than 106 million pizzas a year. Its 13 million customers order on average 4.3 times a year. Around nine million customers now order using its app, with 75% of all digital orders placed on the app. Along with stores in the UK and Ireland, the FTSE 250 company also owns a 12.1% stake in Domino’s Pizza Poland.

For investors, an increase of around £3 million per year in employment costs and concern over further tax rises to come in the next UK Budget, now leave franchisees more cautious regarding new store openings. The impact of US trade tariffs on the global economy, as well as concerns for possible pending UK tax rises, now overshadow consumer spending. Group net debt is up 7% from a year ago to £307 million, while competitors such as Greggs (LSE:GRG) are now offering pizzas and competing hard via online technology for delivery business.  

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To the upside, an under penetration compared to the UK leaves management targeting growth opportunities in Ireland, including a recent share stake increase for Northern Ireland business, Victa DP. A focus on digital orders sees partnerships with Just Eat Takeaway.com NV (EURONEXT:TKWY) and Uber Eats (Uber Technologies Inc (NYSE:UBER)), being progressed. Despite overall pizza market share losses, Domino’s claims to be gaining share, while an estimated price/earnings (PE) ratio of 11 times now sits comfortably below the historical average of 17 times when adjusting for Covid volatility.  

On balance, and while headwinds have increased, an estimated future dividend yield of around 5% is likely to keep income-oriented investors interested. 

Positives: 

• Ongoing new store openings
• Bolt-on acquisition opportunities

Negatives:

• Tough consumer backdrop
• Intense competition

The average rating of stock market analysts:

Buy