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Investors are expressing their dissatisfaction with Domino's Pizza Enterprises Ltd (ASX: DMP) as the company's shares experience a significant downturn, falling by 22% to AU$44.67 on 25 January 2024. This decline comes in response to a trading update released after the market close, shedding light on various aspects of Domino's performance.
Reasons Behind the Share Decline
The sell-off is a direct result of the trading update revealing a mixed bag of performance indicators. While Domino's reports strong sales growth in Germany, Australia, and New Zealand, negative same store sales in Japan, Taiwan, Malaysia, and France are casting a shadow over the overall business outlook.
Sales Performance Overview
Same store sales have seen a modest 1.3% increase for the first half, with total sales reaching AU$2,139 million, representing an 8.8% uptick. This mixed performance contributes to the complexity of Domino's current market standing.
Earnings Forecast and Profit Downgrade
Domino's preliminary net profit before tax is expected to range between AU$87 million and AU$90 million. While this is down from the previous year's $104.8 million, it still shows improvement from the preceding half's AU$74.4 million. However, it falls short of the consensus estimate of AU$103 million, explaining the negative investor sentiment.
Management's Strategic Focus
In response to the challenges, Domino's management is concentrating on growing weekly orders and franchisee margins. Building on successes in the Australia and New Zealand (ANZ) and Germany markets, the company aims to swiftly implement similar approaches across all regions.
Removal of FY 2024 Guidance
Adding to investor concerns, management has decided to remove guidance for FY 2024. This decision reflects the need for further improvements in the second half to boost order volumes.
Broker Response
Goldman Sachs, a prominent broker, expressed dissatisfaction and lack of surprise regarding the update. They identify Japan's heightened competition post-COVID as a structural headwind impacting earnings forecasts.
Goldman Sachs' Evaluation
Goldman Sachs downgrades Domino's with a "Sell" rating, citing below-consensus earnings forecasts. The broker adjusts their network sales and EBIT forecasts for FY24/25/26, expecting FY24 EBIT of AU$211 million, a 4% YoY increase. Despite the negative outlook, they reiterate their sell recommendation.
Market Impact and Valuation
The market is likely to respond negatively to the news, with Domino's trading at 40x 2024E P/E versus the target price (AU$37.5) implied 26x. Goldman Sachs' adjustment in valuation reflects the evolving dynamics of the industry.
Conclusion
In conclusion, Domino's Pizza faces significant challenges reflected in the market's response. The mixed sales performance, profit downgrade, and removal of FY 2024 guidance contribute to the uncertainty surrounding the company. The strategic focus on improving order volumes and franchisee margins is crucial for Domino's to regain investor confidence.
