Pizza delivery leader Domino’s (DOM) served up a 13.5% rise in first half operating profits to £45.8 million and reinstated its dividend on Tuesday.
Yet the share price soured 1.6p to 323.4p as the company issued a cautious second half outlook and the market digested news of extra Covid-19-related costs, as well as a persisting ‘challenging’ relationship with franchisees who want a bigger slice of the profits.
SYSTEM ADDICTS
The UK’s leading pizza brand and a major player in the Irish market, Domino’s UK & Ireland system sales for the six months ended 28 June were up 5.5% to £628.9 million thanks to a jump in online orders in the second quarter.
The firm said it would pay its deferred 2019 final dividend of 5.56p, amounting to £26 million in total, next month after seeing an ‘encouraging’ start to the second half.
However, given the ‘considerable uncertainty ahead’, including the risk of a second lockdown and an expected decline in consumer spending, and the need to maintain a strong balance sheet, Domino’s won’t be paying an additional interim dividend at this time.
UNCERTAIN TIMES AHEAD
Domino’s said trading in the first few weeks of the second half had been encouraging, assisted by the vast majority of the estate having reopened for contact-free collection, the return of Premier League football, as well as an increase in UK staycations and more recently the VAT reduction on hot food, which has enabled franchisees to sharpen their local deals.
Nevertheless, chief executive Dominic Paul, the former boss of Costa Coffee who joined Domino’s in May, warned ‘the macroeconomic, consumer and competitive backdrop for the second half of the year contain considerable uncertainties’ and conceded it is ‘too early to conclude on how consumer behaviour will evolve’.
With lockdown restrictions easing, Domino’s incremental Covid-19-related costs are declining. Yet the pizza chain still expects to incur £2 million of such costs in the second half, all of which will be in the supply chain, albeit down from £6.2 million of Covid-19-related costs in the first half.
Broker Numis Securities is sticking with its ‘add’ recommendation on Domino’s and downgraded this year’s pre-tax profit estimate by 4% to £96 million on today’s update.
‘As expected, franchisee profitability rose (up 12% to £85,000) which should help the well publicised “challenging” relationship. The second half has started off “encouragingly” but with circa £2 million of Covid costs expected in the second half and an uncertain consumer outlook, we trim our estimates’, said Numis.
