ii view: Domino's Pizza slices profit prediction

First-half results to 30 June

• System sales up 0.2% to £767.7 million
• Revenue down 1.8% to £326.8 million
• Adjusted pre-tax profit (EBITDA) up 0.4% to £69 million
• Interim dividend up 6.1% to 3.5p per share
• New £20 million share buyback programme
• Net debt of £285 million, up from £233 million in late December

Guidance:

• Now expects full-year adjusted profit to be at the lower end of analyst forecasts 

Chief executive Andrew Rennie said:

“In Q2 we grew orders, with a notable improvement from the middle of May and importantly have halted the trend of declining delivery orders. 

"We're executing well in an uncertain market thanks to our unrelenting focus on brilliant value, quality and service for our customers. Our average delivery time is now 24 minutes, which creates even better value for our customers. 

"We continue to operate a capital light business and are moving towards our goal of building a larger and more profitable business for our shareholders, franchise partners and colleagues."

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ii round-up:

Domino's Pizza Group (LSE:DOM) today lowered its expectation for full-year profit but pointed to a pick-up in recent trading aided by the Euro’s football tournament. 

The UK and Irish pizza seller now expects adjusted profit for the year to late December to be at the lower end of analyst forecasts of between £144 million and £149 million given a slower-than-expected start to the year. Second-quarter trading, however, had returned to growth, pushed by group initiatives including the rollout of delivery on Uber Eats and demand resulting from the Euros.

Shares in the FTSE 250 company fell 5% in UK trading having come into this latest news down by almost a fifth year to date. That’s similar to coffee seller Starbucks Corp (NASDAQ:SBUX) and better than a near halving for rival pizza seller Papa John's International Inc (NASDAQ:PZZA) in 2024. The FTSE 250 index is up 4% this year. 

Domino’s holds the master franchise agreement from the founding US business, operating 1,344 stores across the UK and Ireland. 

System sales or those combining franchised and corporate stores, was flat for the first half to late June at £767 million, with adjusted profit (EBITDA) also little changed from a year ago at £69 million, hindered by interest and marketing costs.

A 6.1% increase in the interim dividend to 3.5p per share comes alongside a new £20 share buyback program. 

Lower-than-anticipated investment costs following last year's purchase of Irish franchise operator Shorecal for £62 million are now expected to contribute £5 million to full year adjusted profits.

Group net debt rose to £285 million from £233 million at the start of the year, although is expected to reduce to between £250 million and £270 million come the end of the year. 

Reported pre-tax profit for the half-year fell by just over a third to £59.4 million, partly dragged down by £8.1 million of exceptional items including those for acquisitions. A third-quarter trading update is likely mid-October. 

ii view:

The FTSE 250 listed company opened its first UK store in Luton in 1985. Today it delivers over 106 million pizzas a year. It expects to open around 70 new stores in 2024, up from 61 in 2023, with management targeting store numbers of 1,600 come 2028 and over 2,000 by 2033. That potentially takes system sales to £2 billion by 2028 and to more than £2.5 billion come 2033 compared with £1.57 billion in 2023. 

For investors, elevated borrowing costs continue to leave consumer spending pressured. Disagreements between Domino’s and its franchise operators have in the past disrupted operations. Costs including food and staff wages remain elevated, while competitors such as McDonald's Corp (NYSE:MCD) are not standing still, focusing on new drive-thru outlets. 

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On the upside, group initiatives are behind a pick-up in recent orders. Investment in new stores is being made which includes ambitious medium to longer-term expansion plans. Delivery via both Uber Eats and Just Eat Takeaway.com NV (LSE:JET) is now available, while a focus on shareholder returns includes a new share buyback program and forecast dividend yield of around 3.6%.

A consensus analyst fair value estimate above 400p per share is likely to excite some investors, but Domino's has had a terrible year and, while it is an established brand, there's work to be done if the shares are to revisit previous highs. 

Positives: 

• Ongoing new store openings
• Over £460 million of shareholder returns made since March 2021

Negatives:

• Tough consumer backdrop
• Intense competition

The average rating of stock market analysts:

Buy