- Delivers news of 13% pre-tax profits plunge
- Pizza brand reports strong end to 2022
- But no EBITDA growth forecast for 2023
Shares in Domino’s Pizza (DOM) were marked down 9% to 260p after the UK’s leading pizza brand warned earnings before interest, tax, depreciation and amortisation (EBITDA) for 2023 is likely to decline by 1% year-on-year after £9 million of costs involved with upgrading technology systems.
The alert overshadowed news of a strong finish to 2022 with fourth quarter like-for-like system sales growth of 13.9% boosted by the Qatar World Cup.
The FTSE 250 food delivery chain also flagged a positive start to 2023, supported by continued UK takeaway market share gains.
TECH INVESTMENT EATS INTO PROFIT
Results for the year to 25 December 2022 revealed a 13% year-on-year drop in underlying pre-tax profit to £98.9 million, slightly below the £100 million consensus was calling for.
The profits decline reflected increased interest charges and ongoing investment into upgrading the company’s technology systems.
Domino’s has been spending on its digital capabilities as it seeks to become increasingly asset-light and is hungry for more customers to install its app on their phones, since these types of users typically spend more than those who only order via the website.
LOTS TO BE EXCITED ABOUT
Domino’s interim CEO Elias Diaz Sese said: ‘Our outstanding Q4 performance gives the business powerful momentum into this year and there’s a lot to be excited about.
‘Strong national value campaigns, continued growth of collections, accelerated new store openings, digital initiatives and a full year on the Just Eat platform are all set to drive further growth.’
A beneficiary of the pandemic when locked down consumers spent money on takeaways as affordable treats, Domino’s position looks less robust as the cost-of-living crisis means many hard-pressed people simply won’t fork out for a pizza delivery.
Yet despite headwinds from inflation and the squeeze on disposable incomes, Domino’s Pizza has enjoyed a strong start to 2023 with like-for-like system sales up 10.8% in the first 10 weeks, orders up 2.5% and new app customers up 46%.
As Julie Palmer, partner at Begbies Traynor (BEG:AIM), pointed out: ‘One might have expected cash-strapped consumers to steer clear of expensive pizzas delivered to their homes given the cost-of-living crisis, but that’s not the case at Domino’s.
‘Sales have held up impressively helped in part by discounting and deals as consumers were reluctant to give up the occasional treat despite the tough times.’
Yet AJ Bell investment director Russ Mould stressed the cost-of-living crisis has forced Domino’s to ‘rethink how it does business. A £20 pizza is now off the menu for a lot of people, hence why it has been offering cheaper-priced deals. That puts pressure on the business to get customers to order more frequently, which is a tough ask in the current economic environment.
‘With competition fierce and consumers watching their pennies, Domino’s could have a very difficult year ahead. The market seems to agree, given how the shares have been falling over the past few months.’
BROKER VIEWS
Forecasting a 2023 EBITDA decline from £127 million to £125 million, Liberum Capital commented: ‘We struggle to see the like-for-like performance continuing for the rest of the year given consumers’ budgets will be stretched further from April,’ warned the broker.
But Numis was more positive on the stock, flagging a 30% discount to global peers Domino’s Pizza (DPZ:NSE) and Domino’s Pizza Enterprises (DMP:ASX) as well as the ‘strong likelihood of further capital returns’ in the second half.
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 (Tom Sieber) own shares in AJ Bell.
