Domino’s Pizza shares tank after price hikes hit interim profit, dividends

Domino’s Pizza shares crashed 25 per cent after it admitted delivery price hikes designed to help it cope with inflation turned off customers and sent sales plummeting.

Domino’s Pizza shares crashed 25 per cent after the global pizza chain operator admitted it had mishandled a round of price hikes designed to counter the intense pressure from inflation within its business, but which turned off customers and sent sales volumes plummeting.

The sharemarket rout at one point during trading wiped off more than $1.5bn from the company’s market capitalisation.

A surcharge on pizza deliveries was badly received by diners who pulled back on their pizza orders and patronage of Domino’s stores, and which reverberated across its pizza operations in Australia, New Zealand, Asia and Europe to generate a 28 per cent slump in its interim profit and a hefty dividend cut.

Although Domino’s chief executive Don Meij pledged to fix the pricing problem and win back customers searching for a value, the damage had been done. Sales for the start of the second half were less than expected, as the pizza chain worked through its pricing dilemma, and the CEO was forced to concede the once high-growth pizza company was now expecting same store sales to be below its medium term outlook target of 3 to 6 per cent growth.

It said its once ambitious store rollout targets for 2023 could also be below its 8 to 10 per cent medium term outlook.

Domino’s chief executive Don Meij pledged to fix the pricing problem and win back customers searching for a value. Picture: NCA NewsWire/Tertius Pickard

The poor interim profit result, slashed dividend and lingering issues around value for customers sent Domino’s shares crashing 25 per cent and the stock later closed down $16.99, or 23.81 per cent, at $54.37 - a three year low.

The collapsing share price was particularly painful for Domino’s Mr Meij whose shareholding in the pizza company he once started at as a delivery boy lost $30m in value. For billionaire founder of fast-food chain Hungry Jack’s, Jack Cowin, the share price pain was even greater. Mr Cowin is the chairman and largest shareholder in Domino’s and the value of his stock lost just under $400m

Shares in Domino’s are down 36 per cent in the last 12 months and well down from its peak of just over $160 a share in late 2021.

Domino’s interim results released on Wednesday showed that sales fell 4.3 per cent to $1.154bn as half-year net profit slid 28.3 per cent to $63.9m. In Australia and New Zealand, earnings rose 5.2 per cent to $63.4m. But internationally it was another story, with earnings in Asia dropping 20 per cent to $36.4m. Earnings in Europe slumped 48 per cent to $25.6m.

The interim dividend was slashed to 67.4c a share, down from 88.4c, and is payable on March 1.

Domino’s faced double-digit increases in many of its cost inputs through the December half and Mr Meij conceded the pizza maker’s response to combating inflation - by placing a surcharge on deliveries - was a misstep. It helped repair pizza franchisee profitability, however given the speed of the change it was difficult to forecast the effect on customer repurchasing rates, especially where customers order less frequently such as Japan or Germany. In parts of Asia and Europe there was a slide in repeat purchases.

“We haven’t always had the balance right for some customer groups, largely in delivery, as we responded to inflation to protect our franchisees’ businesses – we are working hard to correct that for all stakeholders,” he said.

The pizza boss said in the initial stages of inflation, the company’s expectation was that it could offset increased input costs by providing customers ‘more for more’ rather than passing price through. But this hurt volumes.

Domino’s management was confident in the ability to return to positive same store sales growth once it was able to balance the value equation for customers and improve its pricing.

This had seen the implementation of a ‘flexible voucher” in Australia and New Zealand - that helped customers build their own orders across menus on a voucher system - which was showing some promise.

“The newest product, pricing and voucher initiatives we are testing and implementing are showing promise, but it is too early for us to be definitive on the outlook for their performance.”

Analysts were scathing on the result, with Barrenjoey analyst Tom Kierath calling it a “weak result” in a note to clients titled, “More Soggy Pizza”.

Investors and analysts were angry too that it was only in December at a capital raising Domino’s did not disclose any slump in its trading or financial outlook.

Citi analyst Sam Teeger said the weakness in the interim result, sales and rollout pace combined with Domino’s walking away from its earnings guidance which it gave at the annual general meeting only months ago could make the bulls on the stock question whether Domino’s deserved the premium multiple it traded on.

Another analyst said the result when put against upbeat trading updates in November and December had caused Domino’s a “credibility problem”.