- Pizza brand capitalises on weak share price
- Feeling effects of overexpansion
- Net debt guidance increased
Food purveyor Domino’s Pizza (DOM) has decided to take advantage of its lowly share price by launching a fresh £20 million share buyback, news that stoked appetite for the stock with the FTSE 250 firm’s shares rallying 6% to 207.2p in early dealings.
To complement its organic growth ambitions, Domino’s is looking to add another brand to its stable, but the UK’s leading pizza brand has previously said it would revert to share buybacks should an acquisition not be found before the end of this year.
Shore Capital’s Katie Cousins and Greg Johnson believe management is ‘still assessing the second brand opportunity’ as part of Domino’s medium to long-term strategy. ‘However, no updates have been provided on the timing.’
CASH DELIVERY
The holder of the master franchise agreement to own, operate and franchise Domino’s stores in the UK and Republic of Ireland, the company said the buyback will enable it to ‘take advantage of the opportunity to purchase shares in meaningful size at current share price levels generating attractive returns for shareholders. The programme will be reviewed, as a matter of course, later in the year.’
The directors remain ‘confident in the prospects for Domino’s Pizza Group’s highly cash generative, resilient and market-leading business, with a robust financial position and its strategy to create shareholder value which is underpinned by its existing capital allocation framework.’
DEBT GUIDE DISAPPOINTS
Domino’s said its expectations for 2025 remain unchanged from the time of its interim results (5 August), except that it now expects to report year-end net debt in the £280 million to £300 million range. That’s up from previous guidance of £260 million to £280 million.
Last month, Domino’s reported a 15% decline in first half pre-tax profit to £43.7 million and lowered full-year guidance citing ‘weak’ consumer confidence, although the company insisted it was gaining market share.
Domino’s also signalled a slowdown in the pace of new store openings, reflecting a more cautious approach from franchisees. A slower planning environment means the company now expects to open mid-20s new stores form around 50 stores previously.
EXPERT VIEWS
Despite Domino’s low valuations, Shore Capital downgraded its recommendation on the stock to Hold following the interims due to ‘concerns about slow trading and macroeconomic backdrop headwinds’ and ‘would like to see evidence of like-for-like sales improving over H2 and margin pressures easing before turning more positive.’
AJ Bell investment director Russ Mould observed that while Domino’s claims to be gaining market share there seems to be some scepticism in the market about households’ continuing willingness and ability to spend £15 on a large pizza when you can get one from a supermarket for a fraction of that cost.
‘Management have provided their own vote of confidence today by unveiling a buyback which had been hinted at in the recent half-year results. That’s sent the shares higher, but still well below levels seen two years ago,’ said Mould.
‘Companies are often accused of getting the timing wrong when purchasing their own stock but Domino’s is buying into considerable price weakness. What may raise a few eyebrows is this return of capital is accompanied by an increase in the forecast for full-year net debt. Though, reassuringly, the company is sticking with its 2025 guidance in other respects.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Steven Frazer) own shares in AJ Bell.
