Pruning the Danish
NETWORK OPTIMISATION
Need To Know
- DMP closes Denmark and other underperforming stores to improve FY24f EBIT by $25-30m
- Group same store sales 2H23 +0.2% indicating slowing sales growth
- Consensus downgrades of ~20% expected for FY24 forecasts even with cost savings
Domino’s is taking hard action in the face of ongoing soft sales growth and falling earnings. Non-recurring costs of $80-93m in FY23 are now expected with further costs to be incurred in FY24 in order to streamline operations.
Store closures. DMP will close the underperforming 27-store Denmark operation and close a further 65-70 underperforming corporate-owned stores. In total, this represents less than 2% of the global store network but is symptomatic of the current difficult operating environment. The original target for Denmark was to add 150 stores by 2033.
DMP confirmed that 2H23 EBIT has not improved on 1H23 resulting in 2H23 EBIT being -21.3% compared to 1H22.
Removing the underperforming stores is expected to lift FY24 EBIT by $25-30m.
DMP will look to reduce its corporate store count by 15-20% through either closure or by re-franchising to existing franchisees. The latter shifts the operating costs to improve these stores to the franchisee.
Store openings in FY24 will be below the medium term outlook of 8-10%, as previously indicated at the interim result in February.
Trading update. DMP said group same store sales growth in 2H23 to date is +0.2% (Q4 +2.0%) although this includes Taiwan where COVID restrictions remained in place to October 2022. Excluding Taiwan, SSS growth in 2H23 is +1.0% but this remains well below the smedium term target of 3-6%.
Investment View
The essence of the store optimisation is to improve earnings by trimming underperforming stores. There is nothing wrong with this strategy except it does not address the slowing rate of sales growth and the (falling) underlying profitability of franchisees.
Consumers are tightening their belts which means less spending on discretionary items, even pizza. We expect the low rate of sales growth to persist and for operating margins to remain under pressure despite signs of stabilisation.
Consensus earnings forecasts will again be revised downward by about 20% but at around 23x FY24f EPS, this is approaching a low point. We retain our Hold recommendation.
Stock Overview
Share Price
Company Overview
DMP is a pizza business with over ~900 stores in Australia and NZ, over ~1,400 stores in Europe and over ~1,400 stores across Asia. The company is highly skilled in online delivery service supported by sophisticated marketing.
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