The UK’s largest pizza delivery operator, Domino’s Pizza Group plc, headed in the wrong direction this afternoon, with the shares falling more than 2% in the afternoon, on the London Stock Exchange following a tentative trading statement that pointed to rising operational expenses and a slowed same-store sales increase.
The FTSE 250 member, which already carries a 49% fall per year, had its shares drop to 280 pence, annihilating previous gains and raising the scale of fears about the susceptibility of the fast-food industry to tightened household finances.
The release of the update, which was made before full-year results in early December, showed that the like-for-like sales growth was only 1.5 per cent in the third quarter, significantly lower than the consensus of 3 per cent and a remarkable decline on the previous quarter of 4.2 per cent.
The slowdown was blamed by the management on foul weather conditions and a higher promotional effort, which reduced the margins amid a 5% increase in the total sales in the system to PS1.2 billion owing to the addition of new stores. Adjusted EBITDA forecasts of fiscal 2025 were reduced to PS140 million as compared to PS145 million, considering the increased labour and energy costs due to sustained inflation.
This attitude softens the precarious nature of discretionary spenders in an expensive setting, with a report by the Office for National Statistics indicating that food prices have still remained at 2.8%.
Domino, boasting more than 1,300 restaurants in the UK and Ireland, has traditionally been offering fast delivery and value offers as part of its efforts to retain market share, but its competitors, such as Just Eat Takeaway and Deliveroo, are increasingly launching discount deals at each other. The asset-light franchise business model that the company has adopted leaves it exposed to royalty changes in line with store-level profitability that declined 3% quarter to quarter.
Pundits cooled their excitement with Barclays reducing its price target by 320 pence out of the 350 pence, but maintaining a rating of hold. The note said that the resilience of Domino’s in times of recession was established, and the situation was not clearly visible in the short term due to consumer caution.
Shares, which hit a low of 250 pence in September, have gained 12 per cent in the last month on the hope of a festive revival, but the current action puts the shares 48 per cent below where they were at the start of the year, at a pathetic 12 times forward earnings – a valuation in the screamer and an execution in the whispers.
The episode reflects the turbulence in the FTSE 250 consumer discretionary arena, where restraint in spending has cut down names of Greggs to Mitchells and Butlers. Wider FTSE 100 firmed at 8,250, rising 0.1% on mining strength, but the mid-cap index fell 0.2%, as traders moved on to the defensive side before the Bank of England announced its rates.
FTSE 250 Consumer Stocks Under Pressure as Domino’s Banners Margin Erosion in Hard Trading
The misery of Domino was felt in circles with PizzaExpress owner Hamsard gaining 1% on speculative buyout news and Deliveroo dropping 0.5% on volume issues. The sub-index of the sector, which is -15% YTD, indicates a sharp turnaround: affluent urban people who buy takeaways instead of cooking at home, according to Nielsen data, which indicates a decline of 7% in out-of-home dining.
In its fundamental terms, the strategy of Domino revolves around digital innovation and globalisation. Its app brings the group 40% of orders, and it is supported by AI-optimised routing, which has reduced delivery times by 10%.
In Switzerland and France, overseas growth increased by 200 basis points, and the management is targeting 50 new locations every year to reach 1,500 stores in the UK by 2028. However, franchisee resistance to royalty increases by 1 to 6% has raised the scent of discontent that could limit network density.
There are economic crosscurrents which make the story complicated. As unemployment is creeping to 4.5 per cent and real wages are stagnating, the Autumn Budget announced by the Chancellor on November 27 is big.
VAT increases on takeaways rumours would hurt 2-3rd of revenues, but fuel duty freezes would counter logistics expenses, which shot 8 rd this quarter. In an interview with reporters, Domino’s chief financial officer emphasised promises of price neutrality, promising no vacuous increases regardless of the cost of inputs.
To this gritty chapter, the chain was known as 30-minute guarantees, created in the year 1999. It managed lockdowns through collection model pivots after the pandemic, reporting 20% revenue CAGR 2020-2023. However, normalisation has shown faults: store-level profitability of 18, versus 22, with rent increases and minimum wage increases to PS11.44 in April next year.
The story of the investor flows is rather alarming: the turnover increased to twice the normal level, the short interest reaching 5% of the float as hedge funds bet downward. The 3.5% dividend yield, which is 1.8x the earnings, will continue to be an attraction, but suspension fears, not seen since 2020, re-emerge in the case of continued cash burn. At the existing multiples, the stock creates a classic turnaround: High beta volatility covering a moaty brand in a PS10 billion addressable market.
Budget Blues: Can Fiscal Tweaks Salvage UK Fast Food’s Festive Fireworks?
With the blueprint of the fiscal strategy of Reeves coming to pass, Domino is making more calls to be relieved. The British Retail Consortium is a lobbying body which estimates PS1 billion in business rate reductions will result for the hospitality sector.
A proposed 1 per cent National Insurance reduction among low-income earners would pump up disposable income, which would raise order volumes by 5 per cent over Christmas, 30 per cent of annual sales.
Tech bets provide a backlash: hybrid fulfilment with Uber Eats and blockchain traceability with supply chains have a 15% efficiency boost by 2026. Bolt-ons in Europe call out with PS50 million of free cash flow, but there is a cost on the balance sheet of integration; its net debt is 1.2x EBITDA.
Sceptics also highlight the risks of saturation: 20 new stores a quarter places a cap on capex of PS80 million and the urbanity of the density in the footfall. Toppings that are import-based are hampered by a sterling rally, which is up by 1.5 per cent this week, and the cheese production is threatened by outbreaks of avian flu. Still, the defensive properties of Domino’s 70% recurring revenue will safeguard against Armageddon situations.
Shareholders suffer the grind: 5-year returns are 30 per cent below the FTSE 250, but contrarians see an entry point at 270 pence and an upside of 15 per cent on a sales turnaround. The momentum could be dependent on the Black Friday values next week.
Domino Pizzas represents the squeeze in the consumption conundrum in the UK: luxurious and tight in a box of pizza. With an adaptation of heritage warmth and adaptive spiciness, this FTSE 250 staple competes over bits of devotion. The question is whether it will reheat or cool down with the loosening of wallets, or a pitching in by policymakers.
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