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Shares of Domino's Pizza Enterprises Ltd (ASX: DMP) have taken a significant hit, dropping almost 9% to a 52-week low of AU$32.70 in Thursday morning trading. This decline follows the release of a critical business update that has unsettled investors.
Why Are Domino's Shares Crashing?
The sharp decline in Domino's shares comes on the heels of an announcement detailing the closure of a substantial number of underperforming stores in Japan. The company has now completed an extensive review of its operations in Japan and France, leading to strategic decisions aimed at improving overall performance.
Store Closures in Japan and France
- Japan: Domino's will close up to 802 low-volume stores. This decision follows a comprehensive review of store locations, marketing, and pricing strategies. The company expects that neighboring stores will absorb the majority of delivery customers from the closed locations, improving unit economics and minimizing the overall sales impact.
- France: A targeted reduction of 10-20 stores is planned for FY 2025. Similar to Japan, neighboring stores are expected to handle the delivery orders from the closed locations, resulting in improved earnings.
Impact on Earnings and Future Strategy
Domino's management highlighted that the closures of these underperforming stores, which have been contributing to losses, will positively impact earnings. The savings from these closures will be reinvested into additional marketing and advertising efforts to attract more customers and boost order counts in low-frequency markets.
Positive Outlook for Japan and Group Performance
Despite the immediate challenges, Domino's expects a return to positive same-store sales in Japan by FY 2025, with core margin improvements. The company also remains optimistic about the ongoing performance of its operations in Australia/New Zealand, Germany, and Singapore, as well as recent improvements in Belgium, the Netherlands, and Luxembourg.
Growth Projections
- FY 2025: Gross store openings are anticipated to be around 3% of the network. After the closures and the usual annual store closures, growth is expected to be flat to slightly positive.
- FY 2026: Domino's projects net growth of 3-4%.
- Long-term Vision: Management aims to expand the network to 7,100 stores, which is nearly double the current size. This ambitious target is considered conservative, based on lower store penetration than in more established markets.
Broker Reactions
Analysts at Goldman Sachs have reacted relatively positively to the update, noting that the announcement is an incremental step towards improving the quality of Domino's store network without significantly damaging the expected EBIT for FY 2025.
