Pizza delivery chain Domino’s Pizza (DOM) gained 26.9% to 439p as it addressed a long-running issue hanging over the business by securing a three-year deal with its franchisees.
The company had been locked in a dispute with franchise partners for several years, with the latter feeling they weren’t getting a fair slice of overall profit.
The cost to Domino’s is a £20 million investment over the three-year period in in-store innovation and IT systems as well as increased marketing spend and a food cost rebate mechanism. In return franchisees will up the rate of new store openings.
In today’s statement Domino’s itself recognises it has fallen behind comparable Domino’s businesses globally (Domino’s pays a royalty to the owner of the master franchise Domino’s Pizza Inc in the US).
MARKET EXCITED
The market is clearly excited by the potential for this deal to change that with the company also increasing its medium-term expectations and now expecting to achieve at least the upper end of the previously announced targets of £1.6 billion to £1.9 billion of system sales and exceed the medium-term target of 200 new stores.
Numis analyst Richard Stuber commented: ‘Having refreshed the board and exited international markets, we think a resolution with the franchisees was the last major deterrent for many wouldbe investors otherwise attracted to the high ROCE (return on capital employed), cash generative franchise model (£136m returned to holders in FY21).
‘That this has been achieved without an earnings downgrade (talk of a 'profit reset') should be taken very well.’
