Shares in short-sellers’ target Domino’s Pizza (DOM) are down the best part of 50% year-to-date and there could be more pain to come judging by the experience of the takeaway firm’s counterpart in Australia.

Investment bank Jefferies highlighted a negative read-across to Domino’s UK following full year results (24 August) from Domino’s Pizza Enterprises (DMP:ASX), which holds the master franchise rights to the brand in Australia and runs the business in countries including New Zealand, France, Japan, Germany and Taiwan.

Annual results from Domino’s Australia showed that higher inflation is proving difficult to mitigate in Europe and the broker sees this as ‘further confirmation of the cost pressures faced by UK franchisees’.

COST PRESSURE INDIGESTION

Domino’s Australia’s same-store sales were down 1.3% in Europe, where it trades in Germany, France, Denmark and Benelux, worse than the flat result estimated by Jefferies.

And earnings before interest (EBIT) came in 17% below the Jefferies’ estimate as the company struggled to mitigate the impact of inflation, faced a currency headwind and invested in its Danish business.

Jefferies explained that prices are still working through the system in Europe where inflation has been higher and more difficult to mitigate. Domino’s Australia has had to digest increases in energy, labour, food, and construction costs since January 2022.

Surging inflation is a big problem for London-listed Domino’s Pizza, which holds the master franchise agreement to own, operate and franchise Domino’s stores in the UK, Republic of Ireland, Switzerland and Liechtenstein and has a controlling stake in the holders of the Domino’s master franchise agreements in Iceland, Norway and Sweden.

INCREASED FINANCIAL RISK

Domino’s Pizza was a clear beneficiary of the pandemic when locked down consumers spent money on takeaways as affordable treats. Now people are able to dine out again Domino’s position looks less robust and the cost-of-living crisis means many hard-pressed people simply won’t fork out for a pizza delivery.

In its first half results (2 August), Domino’s warned profitability is expected to be second half weighted due to the lag in passing through food cost inflation to its franchisees.

Following the numbers Liberum Capital warned: ‘At a time when debt is now up to circa 2 times (£236 million), and we about to head into a major recession, the group is ploughing on with a further £20 million share buyback program increasing the financial risk’.

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