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Domino’s share price sinks on HY24 update, weak profit

The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price is down 30% after the company provided a trading update for the first half of FY24.

Domino’s is the franchisor in a number of markets including Japan, Australia, New Zealand, France and Germany.

FY24 first half update

It said total same-store sales increased 1.3% in the first six months of FY24, while network sales increased 8.8% year over year.

However, Asia same store sales fell 8.9%. With Japan’s negative sales growth in the year to date, and the weight of corporate stores in this market, first-half earnings in Asia will be “below the prior year”.

Overall, first-half net profit before tax is expected to be between $87 million to $90 million, which is down from $104.8 million from HY23, but up from $74.4 million in the FY23 second half.

Domino’s said its net debt has decreased by $68.7 million to $770 million due to the benefit of savings initiatives and tighter management of capital expenditure. It said it’s “operating with a comfortable margin below its banking covenant thresholds”.

Regional breakdown

In ANZ, Domino’s said delivery orders have “fully recovered following missteps in response to inflationary pressures, helping to rebuild franchise profitability.”

In Asia, the Christmas trading week in Japan delivered higher same store sales than the prior corresponding period, but they were not sufficient to deliver positive network sales growth for December. This may be a key reason for the Domino’s share price pain.

Japan same store sales in the half year to date have recovered to ‘flat’ after the Christmas period.

In the newer Asian markets strong sales growth in Singapore, and improving sales ‘momentum’ in Taiwan have been “offset by a recent softening in trading at Malaysia.”

European operations saw “significantly higher earnings” thanks to the savings initiatives implemented, including the closure of the Danish operations, and a recovery of German earnings. Underperformance in France offset improvements in some of these other areas.

Outlook for the Domino’s share price

The company said it has a goal of becoming the dominant sustainable fast food business in every market by 2030. Perhaps this is easier said than done.

Domino’s pointed out in ANZ it’s seeing customers order more frequently and with a “higher ticket”. This division has seen the “fastest” improvement. These approaches are seeing “positive signs” in Europe as well. ANZ and Europe are seeing improving average unit economics.

But, improvements are “still required” in the second half to grow order volumes. It withdrew any guidance for FY24 it has previously made.

The Domino’s share price hasn’t been this low since 2019. It could be a contrarian opportunity at this stage, but it may also not deserve to trade at the earnings multiple it has been. If earnings grow from here in the second half of FY24, or in FY25, it should be able to justify a higher share price

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