Domino's Pizza Enterprises Ltd (ASX: DMP) shares are under pressure on Thursday.
In morning trade, the ASX 200 pizza chain operator's shares are down 22% to $44.67.
Why are Domino's shares falling?
Investors have been hitting the sell button today in response to a trading update released after the market close on Wednesday.
The ASX 200 share revealed that strong sales growth in Germany, Australia, and New Zealand, as well as a positive operational performance in Europe, have been offset by negative same store sales in Japan, Taiwan, Malaysia and France, which are weighing on the broader business.
This means that same store sales are up 1.3% for the first half, with total sales up 8.8% to $2,139 million.
As for earnings, Domino's preliminary net profit before tax is expected to be between $87 million and $90 million.
This is down from $104.8 million a year earlier, but higher than the preceding half's $74.4 million. Though, it is still well short of the consensus estimate of $103 million, which explains why Domino's shares are taking a beating this morning.
Management advised that it is focused on growing weekly orders and franchisee margins, based on successes in ANZ and Germany, and is moving quickly to apply similar approaches in all markets.
Also weighing on Domino's shares is management's removal of its guidance for FY 2024. It said:
With improvements still required in H2 to grow order volumes, Domino's advises any previous guidance for FY24 performance, de facto or otherwise, is no longer in effect.
Broker response
Goldman Sachs wasn't impressed with the update, nor was it surprised. The broker said:
DMP is our key out-of-consensus Sell within our ANZ consumer/retail coverage, with below consensus earnings forecasts. This profit downgrade supports our thesis that Japan's elevated competition post COVID is a more structural headwind. On the back of this, we cut our FY24/25/26 network sales by -4% to -6% and EBIT by -14% to -8%. We now expect FY24 EBIT of A$211mn (+4pct YoY). That said, we increase our FY25e EV/EBIT based SOTP valuation to 22x for ANZ (from 15x), Europe 20x (from 18x), Asia 20x (from 18x) and SE Asia to 18x (from 13x) as we re-base our discretionary coverage to mark-to-market. DMP trades at 40x 2024E P/E vs TP (A$37.5) implied 26x. We expect the market to take this news negatively; reiterate Sell.
