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IT'S good news on the balance sheet but bad news on the ASX for Domino's Pizza Enterprises (ASX: DMP) today, as the company dropped 14.36 per cent to a 12-month low of $53.56 per share despite a 31 per cent rise in first half net profit.
The Brisbane headquartered company saw its profit soar to $59.7 million and has issued a lift in guidance, around the 32.5 per cent mark, for the full year, but this wasn't enough to meet the market's expectations.
Earning before interest, taxes, depreciation and amortisation (EBITDA) also climbed 33.6 per cent to $116.2 million, with Domino's European business seeing its EBITDA rise 99.7 per cent.
Domino's CEO and managing director Don Meij says same store sales were up 17.4 per cent in Australia and New Zealand, over a period that saw the introduction of a Sunday surcharge.
"It is refreshing our customers have given us credit for the surcharge as part of the introduction of these penalty rates as we continue the award modernisation process," says Meij.
"Ultimately this is our core business - high quality food at an affordable price."
The company revealed its Taste the Colour launch in September, and this was followed by the highest same store sales growth in the company's history in October.
Zeroing in on Domino's franchise model, average weekly sales records has driven same store franchisee profitability to record levels. Same store EBITDA has increased 31.7 per cent over the past two years.
The current store payback for a franchisee is three to five years, says Meij.
Underpayment remains the word on the media's lips, however, as more comes to light about the potential exploitation of Domino's workers. Fairfax Media has been spearheading the investigation.
There are concerns the company has been squeezing its franchisees too hard and there is widespread wage fraud within the company. Fair Work Australia is investigating the company in a process that will take months to complete.
In its half year results issued today, Domino's says it has a 'zero tolerance for unethical behaviour, including under-payment of wages or under-reporting of sales'.
Meij says the company's proactive compliance program is industry-leading, independently audited by Ernst & Young, and over the past three years has involved 456 store spot checks, 102 store audits and investigated 88 individual complaints.
Almost 70 of these audits and complaints are still being investigated.
"Our franchisee profitability figures clearly show there is no reason, nor excuse, for this behaviour. The findings from our compliance program demonstrate no correlation between store profitability and underpayment of wages," says Meij.
An average Domino's store in Australia and New Zealand makes around $1.4 million in sales for the year.
Meij says the 'actions of the minority do not reflect the majority' and the $4.5 million recovered in unpaid superannuation and wages from franchisees represents 0.8 per cent of labour costs in the network for the period. Four franchisees have been removed from the system, who operated seven stores, and an additional 22 franchisees chose to exist.
Meij believes his business is changing and less franchisees will own and operate more stores going forward.
Nearly nine out of ten new stores opened in the last half were with existing franchisees.
"We expect more and more franchisees to go from running SMEs to medium and larger companies, and own four to five stores in the next five years. Were looking at a much more sophisticated pizza store owner."
Domino's will pay shareholders an interim dividend of 48.4c, up 39.5 per cent from a year earlier.
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