Investec starts Domino's at 'sell', highlights challenges ahead

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.

At 1045 BST, the shares were down 6% to 296.40p.