Domino’s reported network sales down 2% and EBIT up 1% in 1H26.  The company is pursuing cost savings and lower discounting aggressively. However, so far the drop in same store sales seems larger than the gross margin gain for franchisees. We expect SSSg to decline in FY26e and return to very modest growth in FY27e as the company focuses more on gross margins. A good portion of targeted cost savings will be passed onto franchisees. Even so they account for less than half the required lift in franchisee EBITDA. Domino’s is taking decisive action to restore profitability but we expect the stock to be range bound until the new CEO starts by August 2026.

Domino’s remains a topical stock with debates about its appeal as a takeover target and also as a cost out opportunity. In our view, these two debates need to accompany a discussion about its weak sales growth and poor franchisee profitability. Without an acceleration in same store sales, cost savings will be difficult to bank for shareholders. If franchisee profitability does not improve, there is a risk there will be more store closures globally.

Domino’s reported FY25 EBIT of $198 million, down 5%. The result showed very weak sales trends across all geographies and EBIT margin declines for Asia are a concern given the significant store closures should have improved profitability.  Franchisee profitability is flat and well below healthy levels, raising the risk of more store closures. The decision to reduce discounting is dangerous in our view as the margin uplift may be wiped out by lower transaction volumes.

Domino’s recently announced that its relatively new CEO Mark Van Dyck would step down. While the Board is supportive of his strategic plan, it wanted faster progress. The limited detail we have on its strategy shows a focus on improved profit margins more so than store growth. We expect limited sales growth and margin recovery will only be evident in 2026 onwards.

The new information in Domino’s 1H25 result about its franchisee profitability and pending strategic update leave a degree of uncertainty on the stock. Franchisee profitability is still 34% lower than where it needs to be. We expect a strategic update in May or June 2025 to focus on margin improvement opportunities. Given EBIT margins are 5% vs a potential of 7%, the upside is meaningful. Domino’s will need a new investor audience attracted to the margin upside, because store growth is likely to be lower.

Domino’s trading update and news of store closures in Japan signals a clear shift towards improving profit margins and existing store sales productivity. We expect profit margins to improve from 5% last year to 7% medium-term. The unknown is whether this occurs by shrinking the network further.

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 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.