Domino’s investors left hungry for more

Domino’s Pizza’s shares have taken a dive 6 per cent after news it missed earnings guidance and new store targets.

Domino’s Pizza chief executive Don Meij. Picture: Steve Pohlner

Domino’s Pizza’s status as a market darling took a further dent when it missed earnings guidance and new store targets, sending its shares diving 6 per cent, but chief executive Don Meij has implored investors not to lose faith as it pumps out record profits from France, delivers a turnaround in Japan and strengthens its flagship Australian business.

Shares in Domino’s that only three years ago were trading above $75 as the market became enamoured with its profit prowess slipped to as low as $41.75 yesterday on the release of its full-year results that undershot earnings guidance. They later closed down $2.13 at $42.28.

Heading into the results, Mr Meij had set down guidance of pre-tax earnings of $227 million-$247m, but the actual earnings came in well short at $220.8m. Domino’s had pledged to open between 200 and 215 stores over the year, but had only opened 179.

Although it posted sales growth throughout all its regions (including Japan, which had suffered poor growth in recent years), as well as strong online sales growth of 18.2 per cent, the earnings guidance miss clearly angered and frightened investors.

Net profit fell 4.6 per cent to $115.9m.

But there were patches of good news from the nation’s biggest pizza chain, with network sales up 11.9 per cent to $2.9 billion and same store sales up 3.6 per cent. Sales across Japan and its markets in Europe all rose, as did earnings.

While Australia and New Zealand sales did rise 4.6 per cent to $1.169bn, its earnings fell 4 per cent to $127.9m as Domino’s spent more money on refreshing stores it took back from franchisees.

Mr Meij yesterday strongly defended the quality of Domino’s fiscal 2019 results as well as its earnings prospects, telling The Australian the business still had long-term growth opportunities and that actions taken this year to invest in its franchisee stores and take back underperforming stores would generate strong returns for investors in the years ahead.

“We were almost right on target with our sales and you can see that online continued to be a driver. What we keep on reminding shareholders is that we are the best in class in that and you can see our online sales grew 18.2 per cent,” Mr Meij told The Aus­tralian.

“Our earnings miss came out of Australia and France, and we spoke about that in the half year.

“In this particular financial year we took back some franchisee stores to make them corporate. That often costs us money because we are investing in training, we are maybe renovating or remarketing the store.

“Now the good news from that for the investment community is that next year and in the coming years we often recycle those stores back at a profit into our system because they are a healthier, stronger, better business.

“Now we did go a little deeper into that than we thought originally, that is a little bit harder to forecast.”

He said this year a sales leap across the group did not feed through to the bottom line.

“In this particular year we didn’t get as much of it (sales) to the bottom line as we highlighted because we incentivised our franchisees in France and took back more (franchise) stores and as a result we diluted the earnings that we may have achieved,” he said.

“Both those things we are going to see the benefit from in the coming year, so yes this is a long growth business, we are ­focused on the long term.”

He said the company’s pizza chains in France were primed to push out among the best profits in the group with further growth ­potential in Japan, where the pizza category was strengthening.

On the outlook, Domino’s said same-store sales in the first trading weeks of the 2020 financial year were up 4.7 per cent.

Domino’s declared a final dividend of 52.8c a share, up from 49.7c last year, payable on September 12.