The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price is down around 10% after an update that disappointed the market.
Domino’s targets profit improvement
The company said that it has taken steps to deliver sizeable, near-term, cost savings, improving efficiency and “building a stronger foundation for future growth”.
It’s going to exit the loss-making Danish market by the end of FY23. Performance has not materially improved since it was acquired in 2019, which will improve EBIT (EBIT explained) by $12 million immediately.
Next, the company is planning to reduce its corporate store network (stores it owns) by around 15% to 20%. Approximately 65 to 70 stores have been open for some time, but are not expected to reach sustainable levels of sales or profitability in the near term, and will close.
Domino’s will “partner” with experienced franchisees to franchise around 70 to 75 corporate stores that are in a ‘turnaround’ phase.
The ASX share expects to deliver annualised saving of around $16 million to $20 million through this corporate store network optimisation.
The third area of improvement for the company is delivering the planned commissary closures in South East Asia and legacy IT assets. This is estimated to deliver annualised EBIT savings of between $5 million and $7 million.
Finally, it’s looking to streamline its core operations and remove operational areas that are not core to its future growth. This includes closing its construction and supply subsidiary in Australia. Ongoing savings will “increase as the streamlining continues”, with around $20 million of EBIT savings from FY25.
In total, annualised savings are expected to be between $53 million to $59 million. This could be helpful for the long-term success of the Domino’s share price.
Trading update
Domino’s said that group same store sales were up 0.2% in the second half and up 2% in the fourth quarter. Excluding Taiwan, same store sales were up 1% in the second half and up 3% in the fourth quarter.
It said that store openings in FY24 will be “below” the medium-term outlook of 8% to 10%. But, not changes are planned for the long-term growth outlook for Domino’s network of 7,100 stores by 2033.
Domino’s is focused in all markets on increasing the number of delivery customers served each week, as this improves franchisee profitability.
Final thoughts on the Domino’s share price
The trading update is promising with an improvement in same store sales. But, with the store numbers taking a hit, network sales will probably take a hit, but overall profitability should be better.
I’m not sure how it will get to its long-term targets without sacrificing some profitability, but it is still expecting growth.
At the current lower Domino’s share price, it could do well in the longer-term as the inflation picture improves, but there are other ASX growth shares I’d rather buy that aren’t in such a competitive industry.
