Domino’s shares dropped over 20%; Here’s why.

Key Highlights:

• Domino's Pizza shares dropped over 20% after the release of 1H FY2023 results.
• The Company reported a fall in its topline and bottomline numbers.
• The dividend was reduced by 23.8%.

Food retailer operating pizza chain Domino's Pizza Enterprises Limited (ASX:DMP) was the biggest laggard on ASX at AEDT 2:16 PM, with ~24% fall in share price. At this time, the shares are trading at AU$54.240.

Why Domino’s shares dropped?

Domino's shares dropped following the release of its weak 1H FY2023 results. The Company highlighted that in 1H FY2023, the global food sales declined by 4% and 0.6% in Same Store Sales. Earnings fell 21.3% to AU$113.9 million. Margins were affected by lower than expected sales and the flow-on effect on corporate stores and warehouse earnings.

In the initial period of 1H FY2023, the Company expected that it could offset improved input costs by offering customers ‘more for more’ instead of passing price through. However, the challenging conditions and the effect on its franchisees forced the business to increase the price and include some surcharges. The Company took this step to protect franchisee profitability. At the same time, it was also difficult for DMP forecast the effect on customer repurchasing rates with the speed of this change, especially in countries like Japan and Germany, where customers order less frequently.

In December 2022, the Company's sales were robust, however, it was not as expected. The consequence of increased prices, and plummeting customer repurchasing continued into January 2023.

A peek into 1H FY2023 highlights:

• Online sales declined 4.5% to AU$1.53 billion.
• Network Sales declined 4% to AU$1,966.3 million.
• EBITDA decreased by 14.3% to AU$182.3 million.
• EBIT declined 21.3% to AU$113.9 million.
• Underlying NPAT (after Minority Interest) decreased by 21.5% to AU$71.7 million.
• EPS declined 21.8% to AU82.5 cents per share (cps).
• There was an 11.1% growth in the networks. DMP added 357 new stores (79 organic and 278 acquired).
• The dividend was slashed by 23.8% to 67.4 cps.
• Net Debt was AU$666.5 million. It was AU$95.8 million above FY2022 due to higher borrowings relating to the Malaysia and Singapore acquisitions, partially offset by AU$163.2 million net capital raising.
• Payables were AU$45.6 million above due to the Timing of Financial close period in Japan as well as the Malaysia and Singapore acquisitions.
• Total available cash and cash equivalents by 1H FY2023 end was AU$143.7 million.

Performance Highlights:

• The Burger Range (ANZ) was themost successful launch since Taste the Colour in 2016.
• New crispy fries were the most successful sides launch.
• The Company expanded in Asia. It made expansions in Malaysia and Singapore, and these markets are trading well.
• In Denmark, the new market campaign, there was a change in customer sentiment towards Domino's.
• Given the trading conditions, the franchisee performance for the December quarter in Europe was robust. Netherlands and Germany were the leaders in Europe.
• Some franchisees exited the business in Asia due to underperformance as part of the constant ABF program.

Outlook:

• In the short-term, the Company expects growth in commodity and labour continuing into FY2024.
• The Company expects further unexpected inflationary pressures to influence unit economics, especially labour growths and short-term energy price rises.
• Initiatives planned to counterbalance inflation are in progress and are expected to improve franchisee profitability and grow customer numbers.
• The Company aims Europe milestone to be 3,050 stores by 2033. ANZ store target is expected to be 1,200 by 2025-2028. In Asia, DMP aims to have 3,000 stores by 2033.
• Same Store Sales Growth is expected to be lower than the 3-5 Year Outlook due to the rough trading conditions.
• Net CAPEX (apart from acquisitions) is likely within its 3-5 Year Outlook.

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