Domino’s Pizza and Royal Mail

“The latest machinations in the House of Commons over Brexit will take place tonight. With sterling still volatile against this backdrop, the FTSE 100 was on the march, recovering some of the losses seen in recent days to trade more than 1% higher early on. “The index is being powered by heavyweight tobacco stocks British American Tobacco and Imperial Brands which have relatively little exposure to the UK’s looming exit from the EU,” says Russ Mould, Investment Director at AJ Bell.

Domino’s Pizza

“Pizza takeaway group Domino’s is stuck between a rock and a hard place. UK growth is proving harder to come by in a competitive and arguably over-saturated market and its overseas operations are still experiencing problems.

“In a sense the company is proving a victim of its own success and even reduced roll-out ambitions in the UK risk cannibalising existing sales as the density of Domino’s outlets increases.

“Beyond these shores the company is really struggling to perfect the recipe which proved to be such a winner at home. “In Norway the company is struggling with the integration of operations it bought back in 2017. There is probably a lesson in not assuming that expansion through M&A is an easy fix amid news that this process has been ‘more complex and challenging than expected’ for Domino’s.

“These growing pains pose an interesting question for shareholders. Would they accept that the company’s expansion phase is largely over and be happy for the business to concentrate on generating lots of cash, something it still does admirably thanks to its capital light franchise model, in order to return it to shareholders?

“Or would they rather management continue to pursue their international ambitions in the hope this can eventually provide another leg to the growth story with all the risks this might entail?”

Royal Mail

“The 330p issue price from Royal Mail’s IPO is no longer looking either the bargain or scandal which different voices argued it was back in 2013.

“Shares in the delivery firm haven’t traded above that level since November last year and today’s update is only sending the share price further into the doldrums at 271.8p.

“Letter volumes are declining even faster than expected amid business uncertainty, but this problem also reflects structural changes as an increasing amount of communication moves online.

“And, at the same time, the company is really struggling to deliver the efficiencies in its operations it hoped for despite the progress it made in getting the unions on side last year.

“Areas of growth like parcel volumes in the UK and the international GLS division face their own problems, with the rate of expansion set to be deliberately slowed in the latter business as the focus moves to getting costs and margins under control.

“All told, there is a huge amount for CEO Rico Black to do if the business is to have a chance of getting back above 330p per share, or even the 455p closing price on its stock market debut.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.