- Price hikes hurting demand
- Australian pizza giant warns growth to disappoint
- Cuts half-year dividend by 24%
Shares in Domino’s Pizza Enterprises (DMP:ASX) plunged 24% to $54.4 after Australia’s largest pizza chain served up a 28.3% first half profits plunge as price rises pushed through to combat surging inflation resulted in a drop in orders from cash-strapped consumers.
The company, which is the fast-food chain’s largest franchisee out of the US with operations in countries such as Australia, France, Germany and Japan, also served up news of worse-than-expected growth in the second half to date with sales down 2.2% on a same-store basis.
Management also warned same-store sales growth will be ‘below the medium-term outlook of 3% to 6%’ as a result of ‘most-recent tumultuous trading conditions’.
Shares in London-listed Domino’s Pizza (DOM) cheapened 4.3% to 298p on the negative read-across.
EARNINGS PLUNGE
For the half to December 2022, Domino’s Pizza Enterprises reported a 4.3% drop in revenue to A$1.15 billion and a 21.3% slump in earnings before interest and tax (EBIT) to $113.9 million.
There was also disappointment as the company cut its interim dividend by 24% to 67.4 Australian cents per share.
CEO Don Meij conceded the company’s response to combating inflation had not been optimal in the first half, yet he remains confident in its strategy to grow order volumes, total sales and earnings.
‘In the initial stages of inflation, our expectation was that we could offset increased input costs by providing customers “more for more” rather than passing price through - an approach deep in our DNA,’ he explained.
‘Given the challenging conditions and the effect on our franchisees we felt it was necessary to lift prices, including applying some surcharges. This was successful in protecting franchisee profitability, however given the speed of the change it was difficult to forecast the effect on customer repurchasing rates, especially where customers order less frequently such as Japan or Germany.’
Specific groups of customers, particularly in delivery, responded to higher prices by reduced their ordering frequency, which resulted in December trading being ‘significantly below our expectations’.
However, the company said it intends to return to higher same-store sales and earnings in the second half by delivering increased choice and value for new and existing customers.
EXPERT’S VIEW
Russ Mould, investment director at AJ Bell, commented: ‘Consumers have had enough of price hikes, judging by comments from Domino’s Pizza Enterprises. Its share price fell 24% after reporting a slump in profit as fewer customers could stomach the higher price of pizzas.
‘This is becoming a trend, with big brand owners saying that sales volumes are falling as customers can’t afford to keep paying more and more for products.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Steven Frazer) own shares in AJ Bell.
