Domino’s Pizza profits tumble despite record store openings, Asian expansion continues

Domino's Pizza (ASX: DMP) achieved its largest full-year new store openings but profits struggled to grow, cycling very high prior-year comparatives and margins tumbled amid industry wide inflationary pressures.

Results at a glance:

Source: Domino's Pizza | Table: Market Index

Missed expectations

Morgans was rather optimistic heading into reporting season with the view that Domino's "is able to mitigate some inflation through its own supply contracts, store efficiencies and judicious menu alterations."

Still, the $165m profit result missed Morgans expectations of $178.5m and Bloomberg estimates of $168.6m.

To be fair, Domino's is indeed cycling rather elevated growth from last year, where profits rose 32.9% to $188.6m.

EBIT margins slumped to 11.5% compared to 13.4% in FY21 and 15.4% in FY19. Domino's said the Asia Pacific region was experiencing lower overall inflation (food, labour and energy) relative to Europe. But Europe inflation has yet to be fully offset and proving more difficult to mitigate.

For context, Europe accounts for around 39.2% of Group sales, followed by Australia & New Zealand (34.3%) and then Asia (26.5%).

More stores plus Asian expansion

Domino's added 294 new organic store or 10% network growth in FY22. With the addition of the company's Taiwan acquisition (156 stores), Domino's store network rose 15.3%.

In parallel with the FY22 results announcement, Domino's revealed the acquisition of 287 corporate-owned stores in Malaysia, Singapore and Cambodia for an initial purchase price of $214m on a cash and debt free basis.

The transaction is expected to be around 5% earnings-per-spare accretive before synergies and one-off transaction-related costs.

FY23 trading update: A slow start

“With menu innovation in all markets and new, app-first technology to roll out this year – there is positive sales momentum, and we expect to be within our 3-6% outlook for same store sales this year," said Managing Director Don Meij.

Domino's will have a lot of catching up to do, given same store sales for the first seven weeks of FY23 was down -2.4%.

"Your friendly local pizza store for just 30x forward into a normalised eating environment for a value conscious inflation-impacted consumer," said Aequitas Investment Partners in a note on Wednesday.

"Same store sales are, for now, going backwards (network -2.4%, SSS -1.1%) although there is a strong store roll out program ahead, which will boost total sales. That said, sales growth expectations are still a high hurdle."