Domino’s recently announced that Don Meij, CEO of the company for the past 22 years, will retire. The Board announced the appointment of Mark van Dyck, as CEO. He is an executive with experience at Compass Group and within the Coca-Cola system. Mr van Dyck presented a sensible approach to improving profit margins, but it will take time as improving franchisee profitability is a first-order priority in our view. 

Domino’s reported FY24 EBIT of $208 million, up 3%. Second-half growth was stronger at 13% driven by cost savings. Same store sales growth (SSSg) remains sluggish but there are some positive signs around franchisee profitability. We expect improving sales trends in 2H25e as Japan and France benefit from higher marketing spend and better profitability. Domino’s also reported an improvement in its gearing metrics in FY24 with a further improvement likely in FY25e. There are signs of improvement to franchisee profitability but remains a long runway to the target of $130k EBITDA per store.

Domino’s investor trip to Germany and France highlighted the role of online food aggregators is significant and partly explains the weakness in France and strength in Germany. Franchisee profitability can lift with higher order count which will be driven by product innovation and growth on the aggregators. While we are more positive, we have two notes of caution. Firstly, we expect the company to step back from the timelines for its long-term store growth and store growth may be 3%-5%, not 7%-9% per annum. Secondly, consensus expectations for sales growth and margin expansion need to be lowered over the next three years.

Domino’s strategy day addressing its Australia/NZ and Asia segments reinforced its long-term ambition for growth. While Australia/NZ is performing well, Japan has challenges because too many stores have been opened too quickly. The issue of franchisee profitability was raised and structural challenges in Japan, Taiwan and France acknowledged by management. As a result, investors should brace for lower store growth including a lowering of the medium-term targets. Store growth of 4%-6% is more realistic than the current 7%-9% target.

Domino’s 1H24 result revealed mixed information. Same store sales growth momentum has improved early in 2H24e and is an encouraging sign. However, the underlying cost growth for the business looks elevated and franchisee profitability is well below levels that will reignite store openings. While earnings may have troughed, we expect an acceleration in store growth is two years away given such low franchisee profitability.

Domino’s company needs to clarify key issues in our view before a positive stance can be taken. We are looking for answers on whether Japan needs to pause store rollouts, the trajectory of sales in Europe and discounting intensity in Australia. There is a wide range of potential outcomes, ranging from whether Domino’s can quickly reignite store growth and pizza volumes or, more likely, store rollout struggles for another three years. Domino’s will release results on 21 February 2024.

Domino’s trading update revealed that sales trends have softened in Europe and remain negative in Japan. Sales are solid in Australia/NZ. The company emphasised earnings are recovering, but the qualifier is that 1H24e EBIT is likely to be down year-on-year. Domino’s is focused on improving franchisee profitability.

Domino’s FY23 EBIT of $202 million is likely a trough given the company’s cost saving program. While pleasing, the lingering concern we have is focused on is weak franchisee profitability, which will limit new store openings. Moreover, Domino’s balance sheet may avoid any major capital raising, but it is also constraining support for franchisees when compared with offshore peers.

Domino’s trading update revealed the company is yet to find a way to raise prices without damaging volumes. EBIT is on track for a 21% fall to about $92 million in 2H23e. We estimate FY23e EBIT at $206 million rising to $223 million in FY24e given announced cost savings. The balance sheet position is particularly tight at the end of calendar 2023, but we see a lower dividend payout as most likely to avoid a capital raising. The earnings trough is in sight. However, the PE ratio is still high and the company will need to demonstrate franchisee profitability can improve in order for the share price to rise from here.

Domino’s “rebasing” of sales is only one of the challenges facing the company over the next two years in our view. The company and franchisees face higher costs and store rollout could slow. The cost pressures that have built in the past six months are likely to lead to some margin pain for Domino’s as it preferences store rollout and market share growth.