The Domino's Pizza Enterprises Ltd (ASX: DMP) share price was a top performer last week, rising by more than 19% in response to the company's profit update regarding the upcoming FY25 first-half result.
There were a few things that may have explained the significant rise, which we'll get to in a moment.
Domino's told the market about two main pieces of information for the HY25 result.
Firstly, underlying net profit before tax (NPBT) is expected to be between $84 million and $86 million for the six months to December 2024, which is within its guidance range.
The company also told investors about a strategy review, which involves reviewing its markets, with key focus areas including Japan and France. Domino's said it plans to close 205 loss-making stores, including 172 in Japan, to improve profitability. This is expected to result in $15.5 million of annualised savings, but there will be a one-off cost of approximately $97 million.
After seeing this update, a number of brokers have given their views on the business. My colleague James Mickleboro has already covered one positive opinion on the pizza company.
Let's look at some other views.
Short squeeze on Domino's shares?
According to reporting by The Australian, E&P analyst Phil Kimber believes Domino's shares were set up for a short squeeze after the company announced a store closure plan because more than 12% of its shares were being shorted.
Short selling is when investors are betting the share price will go down. When Domino's announced its plan, (some of) those shorters may have decided they wanted to buy Domino's shares and close their short position.
Despite the positive update, Kimber doesn't believe there will be an upgrade to what profit analysts are expecting from the business.
According to The Australian, the analyst pointed out that market analysts are assuming a large step-up of profit before tax (PBT) to at least $100 million per half-year period, yet Domino's has only reported about $85 million of PBT in each of the last three half-year results.
Kimber said:
Until Group same store sales sustainably improves to 3 per cent plus, it's hard to see how the underlying Network profit pool can be expanding.
We expect DMP to continue to heavily invest any cost savings back into franchisee profitability which remains well below the required level to drive store expansion and underpin the growth PE multiple of 20 plus times.
The E&P analyst currently has a sell rating on Domino's, with the research outfit expecting PBT of $177 million in FY26 compared to the market's expectations of $207 million
Broker upgrade
Macquarie decided to upgrade the rating on Domino's shares to neutral, according to reporting by The Australian. Macquarie analyst Caleb Wheatley said risks are more balanced on the improving visibility of long-term earnings trajectory. Wheatley then said:
The pace at which new management has identified a recovery path for the portfolio is a significant positive surprise. We expect initial network savings to be allocated to the franchisee network, which supports the long-term outlook for DMP shareholders.
Macquarie increased its price target on Domino's shares by 25% to $35.10 after lifting its earnings forecast thanks to an improved long-term growth outlook. That implies the pizza business may not see any capital growth over the next 12 months.
According to reporting by my colleague James Mickleboro, Morgan Stanley currently has a price target of $40 on the business, which suggests a possible rise of just over 10% in the next year.
