Domino’s Pizza Group plc (LON:DOM) may have lifted first half revenue after its UK expansion but analysts have suggested that recently opened stores are eating away at sales from existing ones.
The takeaway giant opened 40 new stores in the UK in the six months to 25 June but like-for-like sales growth rose just 2.4%, sending its shares down 6.88% to 260.0p in late morning trading.
“In the last 12 months, Domino’s opened around 100 stores in the UK. While these openings are driving headline revenues, they are cannibalising sales from existing stores,” said George Salmon, equity analyst at Hargreaves Lansdown.
Liberum analyst Wayne Brown agreed, reiterating a ‘sell’ rating and target price of 250p.
Brown pointed to a 180 basis point decline in underlying earnings (EBITDA) margins on franchise mature stores to 13.6%.
“With all the growth in first half coming from new and immature stores the acceleration in openings raises a concern on what the impact could be on mature stores which appear to be increasingly under negative pressure,” he said.
Domino's faces slowdown in UK consumer spending and fiece competition
The company is also facing the challenge of weaker consumer spending in the UK as households become increasingly squeezed by rising inflation, fuelled by a Brexit-driven slump in the pound.
Domino’s chief executive David Wild acknowledged that UK consumers are more cautious about the economic outlook but the group is focusing on growth investment with franchisees, boosting marketing and improving customer engagement.
Fierce competition from takeout ordering companies presents another risk to Domino’s outlook.
Brown said he thinks the combination of increased competition from Deliveroo, Just Eat, Uber Eats as well as a resurgent Pizza Hut “raises the question of where is Domino’s in its capital investment cycle”.
Domino’s expects capital expenditure of between £50mln and £60mln. It currently has about £61mln of debt, which equates to 0.6-times operating profit.
The company also plans to invest up to £4mln of gross margin in the second half to support promotions in an effort to fend off competition.
“This to our mind, serves the first time in Domino's history that the Plc is funding directly rebates to support franchisees, which acknowledges the pressures we have been concerned,” Brown said.
“The rebasing of expectations is what we had expected but we need to see if the upcoming promotions deliver the required volume growth of historic promotions.”
Numis analysts more upbeat on Domino's
Numis painted a more positive picture of Domino’s, reiterating a ‘buy’ rating a target price of 450p.
The broker said it saw the company’s decision to open 90 more stores this year, instead of the 80 previously planned, as “encouraging” and a “clear sign in our view that the long term economic attractions from a franchisees' and investors' perspective remain intact”.
Numis also believes shareholder returns “remain strong” with £20mln spent on share buybacks in the first half and a recommended 7.1% increase in the interim dividend to 3.75p.