What's eating into Domino’s Pizza shares?

Domino's Pizza has cashed in on England's World Cup success, although the sales boost has done little for its share price. Graeme Evans explains why.

Despite today's impressive World Cup stats from Domino's Pizza, including selling six pizzas every second during England games, the painful fact is that its shares have now fallen by a quarter since the tournament's opening in June.

Today's 10% results-day slump reflects unease about international costs, a drop-off in the pace of UK store openings, as well as disappointment that first half UK like-for-like sales growth of 5.9% was not a little stronger.

Analysts had been hoping for at least 6%, but it appears the hot weather offset the boost from strong World Cup trading. Competition in the takeaway sector from the likes of Just Eat and Deliveroo also remains fierce, although until recently that’s not stopped the company's shares.

They closed in early June at near a record high of 385p, but have fallen back significantly since then to 285p. UBS thinks that's close to the right level, given that the broker had a sell rating and 270p target price prior to today.

But in the opposite corner, Numis Securities reckons shares offer value as they have been trading at a projected price earnings multiple of 19.1 times, which is considerably cheaper than its peers at about 33 times.

Analyst Richard Stuber reiterated his "Buy" recommendation and said Domino's still had the potential to reach a record high of 458p. 

He added:

"Long term economic attractions from a franchisees' and investors' perspective remain intact with profits improving for both."

The company has 1,213 franchisee-run stores across six markets, including 1,067 stores in the UK. It owns or controls Domino's operations in Switzerland, Iceland, Norway and Sweden, and is a minority shareholder in Germany. 

Despite strong sales, international losses were £1.8 million in the half year as Domino's said it was taking longer than expected to refine the operating model and cost base at a store level, particularly in Norway.

Significantly, Domino's management still expects full-year pre-tax profits to be in line with current market forecasts at around £98.5 million. The long-term target of 1,600 stores also remains intact, even though the company is now guiding towards 60 UK openings this year, compared with 65 to 75 previously.

UBS analyst Heidi Richardson said this indicated that the store openings environment is now more challenging. She also noted that half-year profits of £45.7 million were £1.5 million short of her expectations, hit by the international labour costs.

She added:

"Whilst the stock has already been weak into the results, we believe the slower like-for-like sales, weaker profit growth and store opening run-rate will be a concern."

Richardson has previously pointed to the impact of fast growing competition and lower loyalty in the takeaway sector, as well as greater consumer choice.

Chief executive David Wild admitted that the UK trading environment remained uncertain but said the company was "well placed to thrive".

He added:

"The combination of our scale, brand, value proposition and service continues to resonate with customers, translating into sustained growth in sales and profitability."

Continued investment in supply chain infrastructure and the IT platform were key to supporting future growth, Wild added.

His confidence in the future is underlined by continued growth in the dividend, which increased 8% to 4.05p today. It also bought back £38.9 million of shares in the first half. The dividend currently yields around 3%.