Broker tips: Domino's Pizza, Barclays, UK non-food retailers

Shares in Domino's Pizza weren't looking too tasty on Tuesday as Investec initiated coverage of the stock with a 'sell' rating and 271p price target, pointing to a number of challenges.

The brokerage highlighted rising competition, increased price discounting, new store cannibalisation and a weak consumer environment, all of which are expected to last for some time. In addition, it said rising food and labour costs will squeeze margins. Consequently, franchisee profits are likely to come under pressure in FY17, potentially leading to some risk around the timing of new store openings.

The brokerage estimated that franchisee profitability will drop by more than £20k on average in FY17, with headwinds likely to remain for some time.

"In this context, we believe consensus estimates are overly optimistic on like-for-like sales growth of around 4% for FY17-19; our earnings estimates are circa 4-8% below for the period," Investec said.

The brokerage noted that aggressive discounting by rival Pizza Hut has led to Domino’s increasing its own level of bundle deal discounting.

"Despite this, we estimate Pizza Hut’s average bundle deal discount of circa 41% is still significantly cheaper than Domino’s at around 36%. Discounted bundle deals account for around 80% of Domino’s sales."

Investec also pointed to the growth of online platforms such as Just Eat, Deliveroo, Uber Eats and Amazon, which will continue to offer consumers alternative choices, putting pressure on LFL volumes and providing pricing transparency.

Analysts at Investec reiterated their 'buy' stance and target price on shares of Barclays after the Serious Fraud Office charged four former top executives for 'fraud' and the lender itself with two offences of conspiring to commit fraud and on one account of unlawful financial assistance.

Given the litigation uncertainties, analyst Ian Gordon said no provision could reasonably be assessed in the second quarter of 2016.

"We suspect that this saga could run for years," Gordon said.

Barclays had yet to see an indictmentor statement of facts, he said.

The SFO ruling also meant the stay on the Financial Conduct Authority's own investigation, which had been pending a ruling, was now lifted.

The lender was also facing a civil claim related to the controversial £7.0bn emergency fund-raising conducted by Barclays in 2008, which allowed it to sidestep the government's own Asset Protection Scheme and avoid the risk of being nationalised.

Goldman Sachs recommended clients continue to avoid large non-food UK retailers on expectations that non-food sales would slow as the households saving ratio stabilised and fixed costs rose.

Stronger than expected non-food sales over the past year masked falling market shares for the top 40% of non-food retailers by sales as a result of competition from online-only retailers and independents.

The trend towards online and store closures was set to continue too, according to the investment bank, while the impact of the weaker pound on foreign sales and the year-on-year rate of LFL growth was set to fade.

With online sales for the year to May running at about 7% and non-food online sales penetration at 22%, online was contributing about 1.6% to the sector's rate of like-for-like sales growth. In turn, that argued for a 1.9% fall in store-based LFLs, according to Goldman.

"In combination with rising wage inflation/business rates, this is likely to result in further UK non-food retail EBIT margin weakness (2017E -70bp)," the analysts said.

Hence, shares in Marks & Spencer, Debenhams and Sports Direct were best avoided, with Goldman retaining a 'sell' recommendation on the trio.