Domino’s Pizza: Culling Loss-Making Stores To Bolster Profits

We maintain our AUD 68 fair value estimate on narrow-moat-rated Domino’s Pizza DMP. Same-store sales growth has gradually improved in the second half of fiscal 2023, although it remains sluggish and below Domino’s medium-term 3%-6% annual sales target. The current sales improvement is too marginal to boost second-half operation margins, with management expecting a similar decrease in EBIT to the 21% decline in the first half. Our fiscal 2023 network sales growth and underlying EBIT are largely unchanged at 2% and AUD 207 million, respectively. However, we lower our underlying fiscal 2023 EPS estimate by 11% to AUD 1.35 per share, mainly due to higher interest expenses.

Domino’s is shutting corporate stores and exiting Denmark to bolster profits. We agree with the decision. Hanging on to profitless sales generally doesn’t make sense. Almost 100 will leave the global network over coming months, representing about 3% of the global store network.

By exiting the struggling Danish market, acquired in 2019, Domino’s is losing sales from those 27 stores. But in aggregate, those sales were profitless, and Domino’s expects EBIT to increase by AUD 12 million per year by exiting Denmark.

Additionally, Domino’s expects to close up to 70 loss-making company-owned stores that have no viable path to profitability because of structural obstacles. Those obstacles fall into three buckets: rent is too high, the catchment size is too small and isn’t growing fast enough, or stores are too close to other existing Domino’s stores.

Domino’s also plans to sell up to 75 corporate stores to franchisees that are in their turnaround phase. The turnaround stores are often formerly struggling stores inherited by franchisees and require time and funding to improve. Domino’s intends to accelerate the sale process by offering the stores to franchisees at a discount, or offering other incentives.