Investors lose the taste for Domino's shares after Citi downgrade

Citigroup has downgraded its stance on Domino's Pizza to 'neutral' from 'buy' and cut the price target to 350p from 480p as it pointed to premium multiples and slowing like-for-like sales.

It noted the shares fell 12% on the back of the FY2016 results, mostly related to a sharp slowdown within the company's core UK business for the first nine weeks of 2017.

Citi said the slowdown reflects tough comparatives, market softness and competitive pressure, with UK LFL up 1.5% for the first nine weeks of the year, marking the slowest rate of growth since 2004.

The bank expects the rest of the first half of 2017 to be equally challenging, with the group lapping more than 10% LFL sales growth achieved in 1H16.

"Further volume headwinds exist in 2H17e as pricing may be used to offset creeping food inflation pressure. We now forecast +2.5% LFL sales growth for Domino’s UK business for FY17e (from 5.0% previously). This implies a recovery in 2H17e driven by more effective promotional activity and softer comps in 2H16."

In addition, Citi pointed out that Domino's premium valuation leaves little margin for error, with the shares trading at a calendar year 2018 price-to-earnings of 21x.

At 0900 GMT, the shares were down 2.8% to 337p.