Domino's share price crashes 23% following disappointing first-half result

Domino's has been struggling with its battle with inflation in FY 2023…

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Key points

  • Domino's has delivered a disappointing result on Wednesday
  • The pizza chain operator has struggled in its battle with inflation
  • This has weighed heavily on its profits during the first half

The Domino's Pizza Enterprises Ltd (ASX: DMP) share price is sinking on Wednesday.

At the time of writing, this pizza chain operator's shares are down 23% to $54.80.

This follows the release of the company's half-year results this morning.

Domino's share price sinks as inflation bites

  • Global sales up 1.2% to $1.97 billion
  • Online sales down 4.5% to $1.53 billion
  • Earnings before interest and tax (EBIT) down 21.3% to $113.9 million
  • Underlying net profit after tax down 21.5% to $71.7 million.
  • Partially franked interim dividend down 23.8% to 67.4 cents per share

What happened during the half?

For the six months ended 31 December, Domino's reported a 1.2% increase in sales to $1.97 billion. This was driven by the addition of 357 new stores, which offset a 4.5% decline in online sales. The latter reflects lower aggregator sales and a shift from delivery to carry-out.

Things were much worse for the company's EBIT, which tumbled 21.3% during the half. That's despite ANZ EBIT rising 5.2% to $63.4 million on marginally lower sales of $687.3 million.

The main drag on its performance was its European operations, which have been more affected by inflation. This is largely due to higher levels of inflation affecting larger markets including Germany and France.

Management notes that passing through input costs in Europe has seen a decline in customer counts across multiple markets, particularly in delivery. Nevertheless, delivery orders remain elevated versus pre-COVID levels, and management is working to rebalance the value equation for customers and franchisees.

This earnings decline ultimately led to the Domino's board slashing its dividend by 23.8% to 67.4 cents per share.

Management commentary

Domino's CEO and Managing Director, Don Meij, acknowledged that the company's management of inflation has been disappointing. He said:

Given the challenging conditions and the effect on our franchisees we felt it was necessary to lift prices, including applying some surcharges. This was successful in protecting franchisee profitability, however given the speed of the change it was difficult to forecast the effect on customer repurchasing rates, especially where customers order less frequently such as Japan or Germany.

It meant while we saw an initial benefit to franchisees' unit economics, specific customer groupings, particularly in delivery, reduced their ordering frequency which resulted in December trading being significantly below our expectations.

Fortunately, the customer demand globally for freshly prepared, affordable out-of-home meals, remains strong. This gives us confidence that the power to overcome these short-term challenges is within our control and we will continue to work to get the balance right.

Outlook

While a poor first-half result was expected by the market, the softer than expected start to the second half appears to have spooked investors and put pressure on the Domino's share price today.

Management revealed that sales growth in the second half has been less than anticipated with same store sales down 2.2% and total sales up 4.2%. In light of this, management believes that its full-year same store sales growth will be below its medium term target of 3% to 6% in FY 2023.

Making things worse, the company warned that its new store openings may also be below its medium term target of 8% to 10%. This will depend on franchisee sentiment in the current environment.

Nevertheless, management is confident in the ability to return to positive same store sales growth once it is able to balance the value equation for customers.

It notes that the "newest product, pricing and voucher initiatives we are testing and implementing are showing promise, but it is too early for us to be definitive on the outlook for their performance."

Motley Fool contributor James Mickleboro has positions in Domino's Pizza Enterprises. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Domino's Pizza Enterprises. The Motley Fool Australia has recommended Domino's Pizza Enterprises. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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