Investors take $1.6 billion bite out of Domino’s shares as profit recovery lags

Shareholders have taken a massive bite off the value of Domino’s Pizza Enterprises (ASX: DMP) shares as the Brisbane-based fast-food group flagged lower interim earnings for FY24 despite the company’s business regaining some momentum.

Domino’s shares fell $17.80, or 31 per cent, to a low of $39.50 within the first hour of trading, wiping $1.6 billion from the company’s market valuation.

The wipeout was driven by the announcement of a preliminary net profit before tax of between $87 million and $90 million in the first half.

While this is below the previous corresponding period’s $104.8 million figure, the preliminary estimate is up from the $74.4 million posted in the June half with the latest result aided by Domino’s best sales performance in Australia and New Zealand for six years.

However, the strength in local markets, combined with a solid improvement in Germany, has failed to offset lower volumes across Asia and France.

Domino’s reveals that a decrease in same-store sales in the December half was recorded in Japan, Taiwan, Malaysia and France, which are ‘weighing on the broader business’.

To compound investor angst, Domino’s CEO Don Meij has also advised that ‘any previous guidance for FY24 performance, de facto or otherwise, is no longer in effect’.

Domino’s most recent forecast at the company’s annual general meeting in November was for year-on-year growth for the FY24 financial year to be delivered in the second half.

The company today says that with Japan recording negative network sales for the year so far, first-half earnings in Asia will be below those of FY23.

Domino’s says the launch of new products, including the Smokehouse range, My Domino’s Box and the new Meltzz snacking option, has led to its best sales in Australia and New Zealand in six years.

“Domino’s finished 2023 as the fastest growing pizza company in Australia – with marketing reaching new customers through non-traditional media, as well as through the global partnership with Uber,” the company says.

“Delivery orders have fully recovered following pricing missteps in response to inflationary pressures, helping to rebuild franchisee profitability.”

However, after pinning its hopes on a strong Christmas trading period in Japan, a rise in same-store sales compared to a year earlier failed to translate into positive network sales for December in the region.

Same-store sales for the half-year to date have recovered to be level with last year following the Christmas period.

“In the newer Asian markets, strong sales growth in Singapore and improving sales momentum in Taiwan have been offset by a recent softening in trading in Malaysia,” the company says.

In Europe, Domino’s has seen ‘significantly’ higher earnings in the December half compared to a year earlier thanks to savings initiatives and the closure of its Danish operations.

Domino’s also saw earnings recovery in Germany, which had been most affected by inflation, but the company’s ‘ongoing underperformance’ in France has offset some of the gains made in other parts of its European business.

Meij says Domino’s is currently focused on its plan to grow sales and cut costs, although he concedes that increasing sales in some regions is going at a slower pace than expected.

“Across the group we are focused on delivering inspiring, new products that are great value,” Meij says.

“We are also very mission focused on becoming ‘the dominant sustainable delivery QSR in every market by 2030’, and delivery growth has been the biggest engine room in most markets.

“This has been led by Australia-New Zealand where customers are rewarding us with more frequent orders and a higher ticket and, as a result, the business improvement has been fastest. Many of the same approaches are showing positive signs in Europe.”

While Domino’s franchisee partners in Australia, New Zealand and Europe have improved ‘average unit economics’, Meij says ‘there is more work to do’.

“This will remain an ongoing focus in all markets into the 2025 financial year. With improvements still required in H2 to grow order volumes, Domino’s advises any previous guidance for FY24 performance, de facto or otherwise, is no longer in effect.”

At the time of publication, Domino's shares recovered from their early lows to be trading at $41, down $16.30, at 11.35am (AEDT).