Why Domino's store closures are squeezing short sellers

Domino's Pizza (ASX: DMP) surprised short sellers after the company announced the closure of 172 stores in Japan, alongside a group-wide review that has already identified $18.6 million in savings. The stock surged 14.8% at the market open on Friday.

Domino's is currently the fifth most shorted stock on the ASX, with short interest sitting near record levels of 12.66% as of 31 January. Short sellers have been aggressively betting against the struggling pizza chain amid softening sales, rising costs, and a weak performance in its Asian segment.

Domino's Pizza 12-month short interest chart (Source: Shortman)

In FY24, Domino's reported a 3% increase in earnings before interest and tax (EBIT) to $207.7 million. However, this was offset by a $17.3 million loss in Asia, largely driven by underperformance in Japan. Despite these struggles, the company opened 33 new stores in the region during the year.

"Decisive actions in Japan"

To sharpen its market focus and improve profitability, Domino's is shutting down 205 underperforming stores, including 172 in Japan. The closures are expected to boost EBIT by $10-12 million but will incur a one-off restructuring cost of $61.8 million.

"Many of these stores were opened during the Covid-19 sales surge but have since struggled with declining post-pandemic demand and higher input costs," the company said in a statement.

"Stores selected for closure have low weekly order volumes and limited ability to reach profitable weekly order counts in the near term."

Business review

Alongside the store closures, Domino's conducted a group-wide review focused on two key areas:

• Cost Efficiency: Streamlining the store network and cost base while identifying opportunities for smarter spending in food, packaging, and technology. The company has already identified $18.6 million in annualised network savings.

• Strategic Growth: Developing a refined market strategy to drive sustainable long-term value across its global portfolio.

First-half FY25 sales update

Domino's also provided a trading update for the first half of FY25, with key highlights including:

• Group underlying net profit before tax to be between $84-86 million, within the company's guidance range

• Group same store sales down 0.6% compared to consensus expectations of a 0.2% decline

• Net debt increased by $15 million to $705.1 million, largely due to foreign exchange fluctuations

• Interim dividend of 55.5 cents per share

  • Morgans was expecting an interim dividend of 49.7 cents. The actual dividend was 11.6% higher than their estimates.

• 2H25 (first five weeks) same store sales growth of 4.3%

Putting it all together

Domino's has faced relentless headwinds over the past four years, with the stock plummeting as much as 82% from its September 2021 highs. The company has struggled with the fallout of pandemic-driven growth, poor capital allocation, mounting debt, soaring inflation, and challenging market conditions.

Throughout this period, short sellers have increasingly bet against the company — and for good reason. The short thesis remains intact as inflationary pressures persist, consumer demand remains weak, and Domino's continues to navigate tough markets like Japan and Europe.

However, this latest announcement presents a notable shift. The company is taking decisive action to address its weaknesses through store closures and cost reductions. Notably, this news arrives at a time when short interest is near record highs. Had Domino’s announced these changes six months ago — when short interest was just 4-5%—the market reaction could have been very different.