The Domino’s Pizza Enterprises Ltd (ASX: DMP) share has jumped around 18% after giving the market a trading update.
Business review
The business announced the first outcome of a detailed operational and financial review to improve profitability, strengthen franchise partnerships and positioning the business for long-term sustainable growth and improve shareholder returns.
Domino’s intends to close 172 stores in Japan (58 franchised and 114 corporate stores) to focus on areas where the company can leverage scale, brand strength and operational efficiencies.
These closures are expected to generate annualised EBIT of between $10 million to $12 million while incurring one-off restructuring costs of $61.8 million.
Many of those stores were opened during the COVID-19 sales surge but have since struggled with declining post-pandemic demand and higher input costs.
Stores selected for closure have low weekly order volumes and limited ability to reach profitable weekly order counts in the near term, according to Domino’s.
Some areas in Japan are unable to benefit from Domino’s scale advantages, or were opened prematurely.
The company said it will focus on profitable order growth., where Japan is a “high-potential market” and it will be more focused and disciplined. Japan can continue to play an important role for Domino’s shares.
Trading update
The business reported it expects to report underlying profit before tax of between $84 million to $86 million. However, the store optimisation and associated one-off costs will result in a statutory loss for the first half.
The business revealed its overall same store sales (SSS) fell 0.6%. Looking at the geographic divisions:
- Asian SSS dropped 4.2%
- ANZ SSS rose 0.6%
- Europe SSS increased 0.6%
Unsurprisingly, there was also a mixed performance for network sales, with overall network sales dropped $61.9 million. Here’s the breakdown:
- Asian network sales fell $45.4 million
- ANZ network sales rose $3.5 million
- European network sales fell $20 million
It also revealed that net debt increased by $15 million to $705.1 million, with an underlying reduction in net debt of $31.3 million, offset by $46.4 million in foreign exchange translations due to the weaker Australian dollar.
The business revealed it intends to declare a FY25 interim dividend of $0.555 per share.
Outlook for the Domino’s share price
The company continues to review potential savings with its cost base. The appropriate proportion of reinvestment to the franchise system will be determined as the ongoing review progresses.
In the first five weeks of the second half of FY25, SSS increased 4.3% across the group.
The market seems very excited by what was announced. It’s now only down by 9% in the last year.
I wouldn’t call it a buy right now because the company’s profitability remains a challenge and it’s hard to know how long it’ll take to recover or how much it will recover by.
