Domino's Pizza Enterprises Ltd (ASX: DMP) shares came under heavy selling pressure on Tuesday.
Following a late afternoon rebound, the S&P/ASX 200 Index (ASX: XJO) fast-food pizza retailer closed the day down 5.86% at $43.55 per share.
This came on the heels of the company's trading update, which included cost-cutting measures that will see a series of store closures.
What did the company report?
As a quick recap, the Domino's share price tumbled yesterday after the company said it's closing all 27 stores in Denmark and approximately 65 to 70 other underperforming corporate-owned stores.
That's forecast to see a $25 million to $30 million boost in earnings before interest and tax (EBIT) in FY24, with even larger savings over the following years.
However, this comes with a non-recurring earnings hit of some $80 million to $93 million in FY23.
New store openings in FY24 were also forecast to be below the mid-term outlook of around 8% to 10% growth.
With that restructuring in mind, can Domino's shares still be a long-term outperformer?
What's the outlook for Domino's shares?
For some greater insight into that question, we defer to the lead advisor at the Motley Fool's Dividend Investor, Edward Vesely.
"Almost none of today's announcement is good news for Domino's in the short term," Vesely said, commenting on yesterday's update that sent Domino's shares sliding.
Vesely pointed to management's hopes of turning "around a damaged Danish operation that had been tarnished by a food contamination scandal". But they weren't "able to make up the lost ground".
Management ran into similar reality checks with some company-owned stores, before realising "that established franchisees would be more able to do so", he said.
Longer term, however, Vesely sounded some positive notes on Domino's shares:
Domino's is going to accept that the short-term future won't be as rosy as it hoped and, in the vein of 'never wasting a crisis', is bundling up some changes that will cost money now, but hopefully pay (literal and metaphorical) dividends in future.
He noted that store closures and cost-cutting initiatives, while painful in the short-term, "could be the beginning of a turnaround in the company's fortunes".
"There are no promises here, of course," Vesely said, "but at least actions now are being taken to hopefully improve returns, possibly from FY24 onwards."
According to Vesely:
Returns on shareholder equity (ROE) remain well above 25% with prospects that this can be improved over the next 2-3 years. Gross margins, too, remain above 50%, so there's a great deal of potential for this business once it regains its momentum.
Noting that the next one or two years could be "difficult" for Domino's shares, Vesely said, "Whether the shares look 'cheap' or not, depends on the investor's time horizon."
He added:
Given the company's goal of more than 7,000 stores by 2033 — and the subsequent scale economies it can reap from appropriately larger size and improved operating performance — it also pays for shareholders to think similarly, that is, investing for the next decade.
