The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price has sunk 19% after reporting a difficult first half of FY23.
Domino’s operates in a number of markets including Australia, New Zealand, Germany, France, Taiwan, Singapore, Malaysia and Japan.
HY23 result
Here some of the main highlights from the six months to 31 December 2022:
- Network sales dropped 4% to $1.97 billion
- Network store count grew by 509, or 15.8%, to 3,736
- EBITDA (EBITDA explained) fell 14.3% to $182.3 million
- Net profit after tax (NPAT) sank 21.5% to $71.7 million
- Free cash flow recovered to $15.9 million, reversing the free cash outflow $4.5 million last year
- Dividend per share down 23.8% to 67.4 cents
Domino’s noted that excluding the effect of foreign exchange, global food sales were up 1.2%. Margins were impacted by “lower than anticipated sales, and the flow-on effect on corporate stores and warehouse earnings.”
Management also said that the company’s response to combating inflation “had not been optimal” in the first half. It thought it could sell more food to customers, without passing on prices. But, now it has increased prices, including applying some surcharges. This reportedly protected franchisee profitability.
While unit economics have improved, it led to reduced ordering frequency, leading to December trading being “significantly below” expectations. This has continued into January.
While HY22 ANZ EBIT rose 5.2% to $63.4 million, the Europe EBIT dropped 48.4% to $25.6 million and Asian EBIT dropped 20.3% to $36.4 million. Such heavy profit falls mean pain for the Domino’s share price.
But, the food business remains “confident in Domino’s strategy, and people, to grow order volumes, total sales, and earnings.”
The business has been testing flexible vouchers, allowing customers to save money and choose what they want.
Outlook and thoughts on the Domino’s share price
The business said that it’s expecting same store sales growth to be less than the 3% to 6% annual target. Organic new store additions are expected to be strong, but may also be below the target of 8% to 10% – organic additions were only 2% (or 79 stores) in the first half.
Domino’s notes its Asian business is materially larger compared to pre-COVID and that it will strengthen as more of the store network matures.
With January sales being weaker than expected, the company could have a tricky second half too.
The Domino’s share price is down 42% over the last year. While there may be a recovery from here, I think Domino’s isn’t worthy of an incredibly high earnings multiple. While it’s technologically effective, there is a lot of competition in the food space.
Without raising pizza prices, its margins are hurt by inflation. But, I’d guess customers won’t want to buy as much if the prices are higher. A difficult conundrum which seems to suggest profitability will be hurt either way in the short-term.
There are other ASX growth shares I’d rather invest in.
