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Domino’s goes cold as UBS delivers a ‘sell’ note

Analyst Heidi Richardson thinks Domino’s doesn’t have the same kind of pull it once had given the rise of Just Eat and co., while profitability is falling as cost inflation rises
domino's pizzas
The time of having only a couple of choices for your Friday night takeaway is long gone

A ‘sell’ note from analysts at UBS left Domino’s Pizza Group PLC (LON:DOM) investors with a sour taste in their mouth on Wednesday morning.

Shares in the pizza delivery chain slumped 3.1% to 316.4p as UBS warned that risks from cost inflation and competition pressures aren't currently priced in.

Deliveroo, Just Eat and UberEATS commanding bigger piece of the pie

Like any retail outlet, Domino’s relies on repeat business but analyst Heidi Richardson says that consumer loyalty might be tested as competition starts to intensify.

The greater consumer choice means people aren’t limited to a handful of options on a Friday night anymore, meaning they can pluck for better value deals elsewhere.

Richardson adds that Domino’s position in the UK takeaway market also “looks increasingly challenged” as data from the Swiss bank’s Evidence Lab shows Just Eat PLC (LON:JE.), Deliveroo and UberEATS consistently rank ahead of Domino’s in consumer surveys.

As a result, UBS expects like-for-like sales growth to fall to 2% from 2018-21.

Franchisees’ profitability falling

Away from the customers, the analyst reckons Domino’s might struggle to hit its store roll-out targets as declining franchisee profitability puts people off opening new stores.

Franchisees set their own prices for the pizzas, but Domino’s might have to invest in its own margins to try to encourage store owners to keep their focus on the “value proposition”.

With weaker margins, declining like-for-like growth and increasing competition, UBS chopped its price target to 260p (from 275p) as it downgraded the stock to a ‘sell’ recommendation.

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