ii view: investors shun Domino’s Pizza shares despite ambitious growth plans

Full-year results to 31 December

• System sales up 6% to £1.57 billion
• Revenue up 11% to £680 million
• Adjusted pre-tax profit (EBITDA) up 4% to £138 million
• Final dividend of 7.2p per share
• Total 2023 dividend payment up 5% to 10.5p per share
• Net debt of £233 million, down from £253 million

Chief executive Andrew Rennie said:

“We are rigorously focused on accelerating organic growth and pursuing value enhancing inorganic growth opportunities, to build a larger and more cash generative business, at pace but with discipline.”

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ii round-up:

Domino's Pizza Group (LSE:DOM) today detailed modest growth in annual profit and described a slow start to 2024, but upgraded medium to longer-term growth plans. 

Growth in system sales, or those combining franchised and corporate stores, of 6% to £1.57 billion, pushed annual 2023 adjusted profits (EBITDA) up 4% to £138 million. First quarter 2024 sales are currently expected to be less than the same time last year, although management still hopes adjusted profit will rise to around £148 million, aided by previous cost cuts. 

Shares in the FTSE 250 company fell as much as 10% in UK trading having come into this latest news up by around 40% over the last year. That’s similar to pub group and All Bar One owner Mitchells & Butlers (LSE:MAB) and comfortably ahead of a 4% gain for the FTSE 250 index itself over that time. 

Domino’s holds the master franchise agreement from the founding US business to own, operate and franchise Domino's stores in the UK and the Republic of Ireland. It currently runs just over 1,300 outlets across the two regions, with Domino’s also today confirming the purchase of Irish franchise operator Shorecal for £62 million and adding 34 stores to its owned Irish outlets.

The takeaway and delivery company also outlined plans to expand store numbers to 1,600 by 2028 and to more than 2,000 by 2033, pushing system sales up to £2 billion in 2028 and to more than £2.5 billion five years later. It is also launching new value-based products like a £4 lunch deal next month.

Statutory, or reported pre-tax profit for full year 2023 rose 41% to £115 million, driven by a profit on the previous disposal of operations in Germany. 

A near one-quarter increase in annual free cashflows to £97 million aided £90 million of share buybacks over the year along with a 5% increase in the total dividend payment to 10.5p per share.

A first-quarter trading update is likely to be announced late April or early May.  

ii view:

The FTSE 250 listed company holds the master franchise agreement from the US Domino’s company. The UK business opened its first UK store in Luton in 1985 and today delivers over 106 million pizzas a year. It expects to open more than 70 new stores during 2024, up from 61 in 2023. It highlights its UK takeaway market share at 7.2%, up from 7.1% in 2022. Delivery partners now include both Just Eat Takeaway.com NV (LSE:JET) and Uber Eats. 

For investors, slow earlier year marketing spend to support later year developments has hindered first quarter sales performance. Elevated borrowing costs continue to leave consumer spending pressured, competitors such as McDonald's Corp (NYSE:MCD) are not standing still with a focus on new drive-thru outlets, while cost headwinds such as wage inflation cannot be forgotten. 

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More favourably, Domino’s market share is growing, investment in new stores is being made and the company has ambitious medium to longer-term expansion plans. Previous food cost inflation has also slowed, while shareholder returns remain a focus with the shares on a forecast dividend yield of around 3%.

For now, and while some caution remains sensible, ongoing store expansion, a focus on new value products plus likely growth in popularity when consumers exit a cost-of-living crisis, offer reasons for investors to stay supportive of this iconic fast food play over the longer term.   

Positives: 

• Ongoing new store openings
• Over £420 million of shareholder returns made since March 2021

Negatives:

• Tough consumer backdrop
• Intense competition

The average rating of stock market analysts:

Buy