According to the latest data from ASIC, Domino's Pizza Enterprises Ltd. (ASX: DMP) is one of the most short-sold companies on the ASX, with a staggering 15.17% of its total shares on issue held for short sale.
For context, this is even more than Myer Holdings Ltd (ASX: MYR) – the perennial king of being short sold – which currently has 12% of its shares shorted. Short sellers aim to profit by borrowing shares to sell them at a high price, buying them back at a low price, and then pocketing the difference.
So why is Domino's being targeted so aggressively? There are a few reasons:
- Accusations of chronic underpayment of staff; "A six-month investigation by Fairfax Media into Domino's and its franchisees has uncovered widespread underpayment of wages, the deliberate underpayment of penalties using a delivery scam and the illegal sale of sponsorships of migrants for as much as $150,000." Domino's own audits have also already recovered $770,000 in staff underpayments, with the audit process still ongoing.
- Failed to meet guidance; Domino's failed to meet its profit guidance that was only set just recently, which it attributed to issues with its online platform in France. Separately, there is a French-language video circulating that implies that Domino's exaggerated its technical problems in that region. This may also have contributed to short-sellers bearishness.
- Lofty price tag; in addition to the above, Domino's is trading at a lofty price tag of around 36 times last year's profit, which may prove expensive if the above issues aren't resolved. Additionally, CEO Meij recently sold a bunch of shares which may have strengthened short sellers' confidence.
- Business is driven by selling new franchises; a key element in the Domino's short thesis is the idea that the business doesn't make money by selling pizza, it makes money by selling franchises (i.e., opening new stores) and collecting fees from franchisees. With the reputational damage and rumoured margin pressure on franchisees, it may be that Domino's struggles to add new franchisees in the future.
Clearly, it all adds up into a fairly compelling negative case for Domino's. However, there are also plenty of things to like about the business, including its extensive plans to expand and continued reinvestment in its product offering and services. Domino's also counters many of the short-seller accusations in its presentations, for example by pointing out that average profitability of the Australian franchise stores has grown 25% over the past 2 years.
Investors should familiarise themselves with both the positive and negative aspects of the business before considering a purchase. You may also consider breaking a purchase up into parts, maybe a year or so apart, in order to give time to see if the negative concerns are resolved.
