Inflation slices into profits at Domino’s

As the cost of living crisis intensifies, people are cutting back on takeaway meals – and this more conservative approach to spending is evident in the accounts of some food delivery firms. Last month Deliveroo (ROO) cut its UK sales forecast, but while Domino’s Pizza (DOM) reported a fall in its pre-tax profits for the first half of the year, it looks more resilient.

With the prices of food and energy soaring, the pizza company said it will be passing cost increases on to its franchisees “on a lagged basis”. It expects the full impact of these rises to be registered in the second half of the year. In a bid to retain customers, Domino’s will also hike its marketing spend significantly in the final six months of 2022. 

Macro headwinds are blowing at something of an inopportune time for the company, which resolved a longstanding dispute with its franchisees last year. The company was able to close FY 2021 with increases of more than 10 per cent in both pre-tax profits and revenues. 

Though the current climate will no doubt prove challenging for the company, all has not been lost this year. Domino’s reported a year-on-year gain of 0.6 percentage points in its share of the UK takeaway market and growth of 2.1 per cent in total orders in the first half. 

Management are also keen to show shareholders that the business is resilient and, to this end, have increased the half-year dividend to 3.2p and launched a £20mn share buyback programme. Analysts at Peel Hunt estimate that some £500mn, or almost half of the market cap, could be returned to shareholders in the next three years. 

With shares currently trading on 14.3 times forward earnings, Domino’s looks reasonably priced despite wider inflationary pressures. Buy.

Last IC View: Buy, 357p, 08 Mar 2022