Why the Domino’s (ASX:DMP) share price is crashing 19% today

It has been a day to forget for Domino’s shareholders…

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a man looks sadly away from his computer screen as he holds a slice of pizza in his hand with an open pizza box in front of him on his desk.

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It has been a very disappointing day for the Domino’s Pizza Enterprises Ltd (ASX: DMP) share price.

In morning trade, the pizza chain operator’s shares are down 19% to $114.80.

Why is the Domino’s share price crashing?

Investors have been selling down the Domino’s share price this morning in response to its annual general meeting update.

That update, which was released yesterday after the market close, revealed a surprisingly weak performance from the company’s Japanese operations.

According to the release, during the first quarter, Domino’s Japan delivered strong growth prior to the government lifting national State of Emergency at the end of September.

Since then, with restaurants, bars, and shopping centres now reopened, network sales in Japan are negative on a one-year basis. Though, the company notes they are positive on a two-year basis.

Given current trading conditions and the material contribution of the Christmas trading period to Domino’s Japan’s full year performance, management warned that it was now unable to forecast whether FY 2022 Japan sales and earnings would surpass those recorded in FY 2021.

What about the rest of the business?

Domino’s revealed that first quarter network sales rose 8% or 4.3% on a same store sales basis over the prior corresponding period.

The company stated: “While this represents an improvement compared to the Full Year trading update, sales growth has been uneven across regions, with operations affected by local conditions including lockdowns and ongoing changes in customer behaviour, making short-term forecasts challenging.”

In addition, the company warned that currency and inflationary headwinds would impact its financial performance.

Nevertheless, the company’s CEO, Don Meij, remains positive on the future. Especially given its bold store rollout plans.

He commented: “While there are short-term challenges ahead of us as we transition to ‘living with COVID-19’, this is not new: our experienced teams have successfully navigated multiple challenges since the start of this pandemic.”

“Our network is already more than 7% larger this Financial Year (and 15% larger than this time last year), through continued organic new store openings and acquisitions, including the opening of 66 new stores and the addition of 156 stores with the acquisition of Taiwan.”

“We have a busy new store pipeline and this year we aim to open a record number of new stores; indeed, we are targeting FY22 to be the largest expansion of our store footprint in our Company’s history. We also remain active in pursuing additional markets.”

“A year ago, we noted: ‘We have the right product, value offering, and team members to confront this challenge’ – and our view remains unchanged,” he concluded.

Broker response

This update didn’t go down amazingly well with brokers, which goes some way to explaining why the Domino’s share price is performing so poorly today.

In response, the team at Credit Suisse retained their underperform rating and cut their price target down to $77.73.

Elsewhere, Goldman Sachs is likely to see the weakness in the Domino’s share price as a buying opportunity. While it was disappointed with its update, it held firm with its buy rating and trimmed its price target to $147.00.

It commented: “Overall, we believe that the longer term growth outlook driven by strong store growth remains unchanged. We make no changes to our store forecasts, but backend weight the rollout in FY22 in line with guidance. Overall, our revised forecasts still imply a 3 year CAGR EBITDA outlook of +14.6% driven by overall strength in Europe (+19.7%) and Japan (+15.3%).”

Should you invest $1,000 in Domino's right now?

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Dominos Pizza Enterprises Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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