Shares of Domino's Pizza (DOM) declined on Tuesday after the fast-food chain warned, it no longer expected its international business, which includes outposts in Switzerland, Iceland, Norway and Sweden, to break even after a 'persistently weak' sales, eclipsing a rise in first-quarter group sales. The group reported that the first quarter operating results of the international side of the business were below last year and like-for-like sales were down by 2 per cent, while sales were up 1.1% in the local currency, similar to the Q4 2018 rate of 1.5%. Shares dipped by around 12 per cent in morning trading in London before recovering. They declined by 34 per cent in 2018 due to a row with its own franchisees over their share of the profits.
The group reported that trading visibility was limited, and performance remained disappointing. The company in its full-year results said that it would increase focus on store level performance and informed it has new management in Switzerland, Sweden and Norway. However, given persistently weak system sales in all its International markets, it will tighten its capital deployment and control costs. The first quarter update provided a bleak picture of the operations, and the company will provide a further update at its first-half results.
The company had said in March that it expected its international operations to breakeven but now has cut down its 2019 pre-tax profit forecast by 5 million pounds and revised its guidance of international operations loss to £6.4m versus a previous loss forecast of £1.4m. The group is engaged in negotiating terms with international franchisees. Analysts note that while the business has not made money, its investment in the international market run into hundreds of millions of pounds, indicating a poor overseas track record.
However, despite the weak performance abroad, the pizza group fared better in its home market as UK & ROI system sales were up by 4.8% in the quarter, boosting total sales to £324.4m, representing an increase of 4.5% (organic basis). The local markets in the UK, which account for 90% of its business, were helped by the company’s digital capabilities, with online business reported an 81.7 per cent of total revenue and 90.5 per cent of delivery sales. In the UK, system sales were up 4.7%, with like-for-like growth of 3.1%, while ROI system sales were up 7.4% in the local currency, and 6.8% like-for-like. Compared to nine store openings in Q1 2018, only four new stores opened in the UK during Q1, reflecting ongoing franchisee discussions.
Domino’s UK, which operates the franchise on behalf of the US parent company, has benefited from the boom in delivery food and has been focussing on its online and overseas businesses where it has struggled to control costs. Analysts point out that it has reached a saturation point in its core UK market and now the onus is on its overseas operations to deliver growth.
Share Price Commentary
Daily Chart as at May-07-19, after the market closed (Source: Thomson Reuters)
On 7th May 2019, DOM shares closed at GBX 257.0, down by 1.46 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 390/GBX 220. Total outstanding market capitalisation was around £1.19 billion with a dividend yield of 3.70 per cent.
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