Shares in pizza franchise group Domino’s (DOM) dropped 13% to 323p on Thursday after saying full-year pre-tax profit would only be in-line with market expectations of between £93 million and £98 million, despite strong trading in the third-quarter.
System sales grew 18.7% to £342.1 million in the 13 weeks to 27 September with like-for-like sales up 17.5%. UK system sales were up 19.6% with like-for-like up 18.3% while the Republic of Ireland (ROI) lagged with sales up 3.1% and like-for-like up 2%.
The lockdown accelerated the trend towards digital channels with UK online sales up 35.6% and ROI up 18% resulting in online now accounting for 95.1% of deliveries and 68.6% of collections, up from 45.8% a year ago.
VAT TAILWIND
The drop in VAT from 20% to 5% for 10 out of the 13 weeks had a beneficial impact on system sales due to franchisees not fully passing on the saving according to analysts at Numis.
They comment, ‘the average item price for delivery increased by 10.9% and therefore adjusted for VAT, we estimate Q3 like-for-like would have been mid-to-high single digit like-for-like growth.’
More indicative of underlying sales momentum was the trend in orders which fell by 6% year-on-year compared with 11.6% in the second quarter. An 11.8% increase in deliveries was more than offset by a 41.5% drop in collections.
Strong like-for-like growth driven by price rather than volumes means the impact on earnings is limited according to Numis. It estimates each percentage point increase in like-for-like driven by price impacts earnings per share by only around 0.3%.
The company reiterated the previously announced £2 million Covid-19 related supply chain costs for the second-half of the year which means social distancing measures will be maintained throughout its operations.
STRATEGIC DIRECTION
Management continue to work on a detailed long-term plan, which requires a realignment of interest with franchise partners. Improving economics for the franchisees should be helpful for discussions.
In this regard Domino’s said it was looking to establish a mutually beneficial framework which would ‘include enhanced incentives for both order volume and new store growth, capital investment by us in technology and supply chain operations to support growth, together with investment to upgrade some of our internal capabilities.’
The company insisted it would only agree such a framework which is the interest of shareholders, franchisees and all other stakeholders, highlighting the difficult balancing act it is attempting to achieve.
