- 2024 profits to be at lower end of expectations
- Orders returned to growth in Q2
- £20 million buyback launched
Takeaway firm Domino’s Pizza (DOM) served up news of a tasty pick-up in second quarter orders and also launched a fresh £20 million share buyback programme in show of confidence in its future prospects.
So why did shares in the firm, which holds the master franchise agreement to own, operate and franchise Domino’s stores in the UK and the Republic of Ireland, plunge 7% to a 52-week low of 289p following the release of its first half results?
The key factor was a warning annual profits will come in shy of expectations following a slower-than-expected start to the year as the cost-of-living crisis slowed demand for its products.
Earnings will also be impacted by Domino’s plan to pass on a greater level of food cost deflation to franchisees in the second half in order to deliver value for customers and help sustain a positive relationship given the group’s historic issues with franchisees.
As a result, the FTSE 250 firm now predicts adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) for the year to December 2024 will be ‘towards the lower end’ of the £144.3 million to £149.2 million range of analysts’ forecasts.
SOGGY FIRST HALF
System sales edged up 0.2% to £767.7 million in the half ended 30 June, significantly below the £816 million Jefferies was calling for.
Total orders were down 0.9% at 35.1 million following a subdued first quarter, although the capital-light company’s orders swung back to growth in the second quarter.
CEO Andrew Rennie stressed that following the slow start to the year, his charge now has ‘good momentum in the business with our strategic initiatives gaining traction and our trading performance accelerating steadily against strong comparatives from last year. In Q2 we grew orders, with a notable improvement from the middle of May and importantly have halted the trend of declining delivery orders. These are now returning to growth and this momentum has continued through June and July, helped by a good performance through the Men’s Euro Football tournament.’
In the core UK & Ireland business, Rennie sees ‘significant opportunity’ for further growth through opening new stores, Domino’s new loyalty trial to drive frequency and ‘a focus on value and service, especially in the delivery channel’.
EXPERT VIEWS
Bullish on the stock, Shore Capital continues to see ‘a compelling growth story in Domino’s Pizza, fuelled by store rollout and strategic investments including within Europe through DP Poland. Comparatives should ease during the second half, and we believe along with new store contributions and improving trade, the group should benefit from technological infrastructure and supply chain investments as well as the evolving customer acquisition strategy.’
However, AJ Bell investment director Russ Mould described the results as ‘about as soggy as day-old pizza’.
Mould observed that while the recent boost during the Euros football tournament is obviously welcome, it is also transitory and ‘the fear will be that a difficult first few months of 2024 are more reflective of people’s willingness and ability to shell out £20-plus on a pizza.
‘The company has tried to signal some confidence in the outlook with a £20 million share buyback programme but the market appears unconvinced by this for now and Domino’s really needs to serve up a strong second half to win investors round.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Steven Frazer) own shares in AJ Bell.
