Domino's shares drop on sharp Q4 slowdown

(Sharecast News) - Domino's Pizza Group, the UK-based master franchise of the global takeaway chain, reported increased profit, cashflow and shareholder returns in 2023 on the back of solid organic growth, but shares fell sharply on Tuesday after the company revealed a sharp slowdown in the fourth quarter. The stock was down 7.3% at 341.27p by 1010 GMT.

System sales, which refer to both franchised and corporate store sales, totalled £1.54bn in the 12 months to 24 December, up 5.8% on 2022, with like-for-like systems sales rising 5.7%.

However, organic growth slowed to just 0.4% in the fourth quarter - down from 3.7% in the third and 8.6% in the second - held back by a tough comparator the year before when like-for-like systems sales jumped 13.9%.

Group revenues, meanwhile, increased 11.1% to £667m, helped by the opening of 61 new stores.

The company, which holds a 7.2% share of the UK takeaway market, now has 1,319 stores across the UK and Ireland, but said it expects that number to grow by 70 in 2024, rising to 1,600 by 2028 and 2,000 by 2033. System sales are tipped to rise to £2.0bn in 2028 and £2.5% by 2033.

Statutory pre-tax profit was up 41% at £115m, which was largely due to proceeds from the disposal of its German associate, while underlying pre-tax profit was unchanged at £99m.

Free cash flow increased 22.8% year-on-year to £97, while the final dividend was proposed at 7.2p, lifting the total dividend by 5% to 10.5p.

The company also revealed its was acquiring full control of Shorecal, the largest Domino's franchise business in the Republic of Ireland and Northern Ireland for €72m.

"We are rigorously focused on accelerating organic growth and pursuing value enhancing inorganic growth opportunities, to build a larger and more cash generative business, at pace but with discipline," said chief executive Andrew Rennie. "We look forward to providing an update on these opportunities later in the year."

However, 61% of the deal value will be paid in cash with the remaining to be settled by a share issue, which could also have weighed heavily on the stock on Tuesday.

"The issue of shares to fund the deal will result in some dilution and in the short term it will be taking on a number of stores - a move at odds with its stated asset-light business model. Investors will hope the exit route of finding willing franchisees to take the stores on is a smooth one," said Russ Mould, investment director at AJ Bell.