Could things be on the up for Domino’s Pizza (DOM)? The shares rose by close to 14 per cent on the day management issued a better-than-expected third-quarter update. Like-for-like sales in the UK – up 8.1 per cent in the period – surged past the forecast 3.5 per cent growth rate. That's compared with a 1.6 per cent improvement during the preceding quarter. Internationally, where Domino’s spans Iceland, Switzerland and parts of the Nordic region, like-for-like sales were up a fifth. Given this renewed momentum, analysts believe the group could hit its annual targets, even if like-for-like sales were flat during the fourth quarter.
But there are reasons to remain sceptical. Brokerage Liberum reminded investors that the recent performance was helped by adverse weather and poor comparative figures in the aftermath of the Brexit referendum last year. Analysts also think “the long-term like-for-like sales trend is clear”. During the six months to June, like-for-like revenue growth slowed to just 2.4 per cent, compared with 13 per cent during the same period in 2016. Meanwhile, pressure continues to bear down on margins for the group’s franchisees. Analysts at Liberum are forecasting that the full-year operating margin will decline to 20.8 per cent, from 23 per cent a year earlier, as cost inflation persists. Promotions played a significant part too, so it’s likely profitability didn’t improve as much over the same timeframe.
By contrast, analysts at N+1 Singer praised Domino’s recent marketing campaign “The Food of Everything”, which drove a record 200,000 online orders – 140 a minute – on the last Saturday in September. They also think there’s reason to be optimistic about the rhetoric surrounding new openings. Management said 19 new stores opened in the period, including the 1,000th store in the UK. It also plans to open a record 90 stores in the UK this year, with an encouraging pipeline already in place for new openings in early 2018.
However, there were notes of caution in management’s tone. Chief executive David Wild admitted UK consumers continued to focus on value. But, ultimately, thanks to the recent sales surge, combined with lower capital expenditure commitments, it’s thought full-year profits will be at least in line with current market expectations.
