The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price is in focus after the company announced it was closing stores and lengthening its store opening timeline.
The company has been working on plans for how to improve unit economics and franchise profitability, including in Japan and France.
Japan plan
Domino’s Japan opened more than 400 stores between FY20 to FY23, representing a 67% expansion, but this resulted in a “larger weighting of immature stores in underpenetrated markets.”
However, after that, there has been a period of higher media costs and lower advertising funds from the slowing of sales after the COVID lockdown period.
The company has reviewed store locations, marketing and pricing, and has decided to close up to 80 low volume stores after this review, partially offset by the opening of at least 20 new stores in higher potential locations. A majority of new delivery customers will be serviced by neighbouring stores, minimising the total sales impact.
The total contribution from these low-volume Japanese stores was loss-making, so the closure will have a positive impact. The saved money will be reinvested in additional advertising, which could help the Domino’s share price over time.
Management expect a return to positive same store sales in Japan in FY25.
France store closures
Domino’s France outlined in May the plans to align stores on “best practice systems”, to “improve operations and customer satisfaction.”
The French Domino’s network will be reduced by between 10 to 20 stores in FY25, with 20 to 30 closures offset by 10 store openings.
A majority of the delivery orders from these stores will be serviced by neighbouring stores, with the earnings improvements to boost Domino’s France FY25 EBIT (EBIT explained).
What this means for long-term store numbers
Domino’s revealed there has been positive performance in ANZ, Germany and Singapore with performance improvement in Belgium, the Netherlands and Luxembourg. It’s expecting gross store openings will be 3% of the network in FY25, though net store growth will be flat to slightly positive in FY25 due to the closures. Net growth could be between 3% to 4% in FY26.
This has a knock-on effect to its previous goal of 7% to 9% over three to five years – it’s not going to hit that goal. However, the same store sales outlook is still growth of between 3% to 6% across the group. The timeline for returning to the medium-term outlook will be “determined by continuing improvements in franchise profitability”.
In the long-term, the company still thinks it can reach 7,100 stores, 1.9x bigger than the current network, pointing to upside in large markets such as Germany.
Due to the lower levels of store openings in FY24 to FY26, the 2033 timeline for 7,100 stores will not be achieved. Management are focused on building partner profitability and reducing average store payment to facilitate higher, more sustainable organic store growth.
Final thoughts on the Domino’s share price
It’s good that Domino’s is changing plans to focus on profitability. Opening lots of unprofitable stores has clearly not helped in its weaker markets. Domino’s is not one of the ASX growth shares I’d choose for a high-quality portfolio because of its struggles to regularly get the right balance for profitability.
