'Growing pains' weigh on Domino's Pizza profits

Domino's Pizza reported a drop in annual profit on Tuesday following a mixed year, as the company said "growing pains" hit its international business.

In the year to 30 December 2018, statutory pre-tax profit fell 24% to £61.9m as the group booked costs of £31.5m related mainly to international impairments, UK supply chain transformation and integration.

The group incurred £14.1m of impairment charges to the carrying values of its businesses in Norway, Switzerland and Sweden and recognised £4.5m integration costs in Norway. In the UK, there were costs of £9.5m associated with supply chain transformation.

Revenue during the year was up 12.6% to £534.3m, with group system sales up 9% to £1.26bn. UK system sales increased 7.1%, or 4.6% on a like-for-like basis, while system sales in the Republic of Ireland were up 5.2%, or 4% on an LFL basis.

Underlying basis earnings per share rose 2.5% to 16.1p.

Domino's said its 2019 UK store pipeline is similar to the same time last year, although actual openings are likely to be lower this year given ongoing franchisee discussions. Domino's expects continued UK growth, while the international segment is targeted to break even.

Chief executive officer David Wild said: "2018 was a mixed year. In the UK and Ireland, which account for around 90% of the business, we extended our excellent track record of growth and cash generation, responding well to the very challenging environment for the casual dining market. Our franchisees opened 59 new stores, creating more than 2,000 jobs and sold a record 102 million pizzas. We also continued investing for future growth in digital and by successfully completing our new Supply Chain Centre in Warrington, our most significant investment to date, which supports our target of 1,600 stores in the UK.

"Internationally, we have experienced some growing pains which have hampered our overall financial performance. These are all good markets, with more than 100 million population, good appetites for pizza and little, if any, global brand competition. This is why we have strengthened our management teams and are committing disciplined capital to support future development. We expect an improved performance from International, with the business targeted to break even this year."

At 1300 GMT, the shares were up 0.3% at 233.90p.

Neil Wilson, chief market analyst at Markets.com, said the full-year results served up no real surprises following the January update.

"It's a story of good LFL growth in the UK and record online sales being offset by some weaker performance overseas. Persistent trouble in integrating the Norway business is a concern, whilst tensions with franchisees has cast doubt on UK growth prospects."

Liberum said this was a weak set of results with a high level of exceptional charges and reduced outlook on openings.

"We see little positives in this statement and it is quite telling there is no comment on current trading for the first 8 weeks of 2019. Forecast risk on the downside," said analyst Wayne Brown.

Russ Mould, investment director at AJ Bell, said: "Once the poster child of the franchise industry, profit is now going backwards at Domino’s Pizza.

"Overseas operations continue to be problematic and there has been a backlash against the company by many of its UK franchisees. The latter face rising costs and Domino’s decision to split geographical territories means new stores may be less profitable. As such, franchisees have joined forces to lobby for a greater share of profits.

"These two issues have been hanging over Domino’s for some time and today’s full year results don’t install any confidence that they will be resolved soon.

"It would be fair to say Domino’s language is increasingly cautious and that the outlook is gloomy, particularly in light of a slowing UK roll-out and ongoing discussions with franchisees over commercial terms.

"Two things were notably absent from the results, adding to investor woes. There was no comment on current trading which may lead some people to speculate life isn’t getting better for the business. There was also no new share buyback despite the stock trading close to a four-year low. Companies often buy back shares if they think the stock is undervalued."