- New five-year framework starts on 3 Jan
- Supports growth ambitions
- Drag on profit from new investments
Domino’s Pizza (DOM) has reached a new five-year framework agreement with franchisees, starting on 3 January, which underpins its confidence in reaching a target of more than 1,600 stores and delivering £2.5 billion of system sales by 2033.
The shares fell 12p or 3.3% to 340p as investors reflected on the extra investments implied by the deal which Jefferies estimates will create a rough 7% headwind to profit from 2025.
WHAT DID THE COMPANY SAY?
CEO Andre Rennie commented: ‘The framework is good news for all our stakeholders. Having a five-year framework in place provides a strong platform for the long-term, sustainable growth of the brand, and will help us build a larger and more cash-generative business which will deliver stronger returns.
‘It also means we will be well placed to address the headwinds all consumer-facing businesses will inevitably face in 2025 and will ensure we are in a strong position to thrive in the years that follow.’
The framework replaces a three-year memorandum of understanding which expires on 2 January and has resulted in an increase in new store openings and orders.
HIGHER INVESTMENTS DRAG ON PROFIT
The framework is intended to last beyond five years with arrangements reviewed periodically and adjusted by mutual consent. The board said the long-term nature of the agreement means it anticipates making several ‘additional’ investments to support the growth of the business.
Jefferies estimates these investments will include £3 million to £4 million for enhanced marketing and new store incentives, £4 million to £5 million for cyber security and supply chain investments and a £3 million hit from the Autumn Budget, totalling circa £11 million. It said investors may worry the extra wage costs will pressure franchisee profitability, which could restrict the new store openings programme.
AJ Bell investment analyst, Dan Coatsworth, said: ‘Incentives to drive new store openings show Domino’s believes it can still grow and that it thinks the market is not yet fully saturated in the UK.
‘Proving this to investors is key – with a danger new Domino’s outlets cannibalise existing sales elsewhere and a risk the company doesn’t keep up with shifting consumer tastes.
‘Some households may baulk at paying the best part of £20 for takeaway pizza, at least on a regular basis, and it is far from the healthiest option at a time when people are more conscious of what they eat.’
Shore Capital’s Katie Cousins was positive on the new arrangements saying: ‘The Profit and Growth Framework is a good outcome in our view and should provide stability for the various partners over the medium term.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author (Martin Gamble) and the editor (James Crux) own shares in AJ Bell.
