Domino's shares not so tasty as Berenberg highlights mounting risks
Shares in Domino's Pizza were looking less than tasty on Friday after Berenberg cut its stance on the stock to 'hold' from 'buy' and chopped the price target to 325p from 400p, saying near-term risks were mounting.
Domino's Pizza Group
316.80p
12:30 19/04/24
FTSE 250
19,297.89
12:45 19/04/24
FTSE 350
4,312.19
12:45 19/04/24
FTSE All-Share
4,268.29
12:45 19/04/24
Travel & Leisure
7,474.12
12:45 19/04/24
The bank pointed out that for a number of years, Domino’s delivered very strong revenue growth in the UK, before momentum slowed at the start of 2017.
"While we initially thought this would bounce back quickly, we increasingly believe that some issues could create continued pressure on near-term performance. Some of these have the potential to become longer-term problems but we still feel that, as long as they are dealt with, Domino’s could successfully build a larger business in the UK over time. However, given the near-term challenges, we downgrade."
Berenberg said that while the company has taken advantage of the shift to online ordering in recent years, there are now new players changing the game and Domino's is proving slow to react.
In addition, it highlighted cost pressure on franchisees, which could impact sales. Food price inflation is likely to affect franchisee margins this year as Domino's passes on higher costs. "On its own this should be manageable, given franchisees benefitted from falling food prices from 2014-16. However, combining this with more store splits means the impact may be greater."
Finally, Berenberg pointed to market uncertainty, saying that one of the reasons for the low like-for-like growth at the start of this year was a weak consumer environment. "At the time, we noted the lack of evidence for this. However, since then a host of consumer facing companies have highlighted the uncertain market conditions and spending data has softened."
At 0850 BST, Domino's shares were down 5.4% to 275.10p.