Domino’s Pizza benefits from VAT cut, discusses long-term strategy with franchisees

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Domino’s Pizza Group PLC (LON:DOM) has said the government’s cut to VAT lifted its quarterly sales and added that it is discussing a long-term framework with its franchisees.

In the 13 weeks to September 27, 2020, the pizza delivery firm’s sales in the UK and Ireland jumped by 19% to GBP342mln after the VAT rate changed from 20% to 5% in July, while international sales fell by 5% though businesses in Europe and Scandinavia remain on sale.

READ: Domino’s Pizza creates 5,000 new jobs after pandemic boosts sales

The pizza delivery business also benefitted from staycations and the return of live sport on television, although there was a headwind when competitors reopened following the easing of the coronavirus (COVID-19) lockdown and weaker demand in university areas during September.

The firm, which launched a vegan pizza last month, reopened its collection business, but orders dropped 40% compared to 2019 and are not expected to fully recover until normal consumer behaviour returns.

Full-year underlying profit before tax is expected to come in at GBP93mln-GBP98mln, in line with market consensus and including the GBP2mln of COVID-19 related costs in the second half.

The company said it looks to establish a strategy with its franchisees to include enhanced incentives for both order volume and new store growth and capital investment in technology and supply chain operations to support growth.

Having been in dispute its main franchisees for over a year, Domino’s anticipates it will take some time to reach a conclusion.

‘Unsustainable’ pattern

Liberum noted that the 8% decline in order count is “clearly unsustainable”, when compared to a 43% jump in the same period for competitor Just Eat.

“[It] is driving negative operational gearing, a very significant factor as to why earnings momentum at Domino’s has turned negative and is unlikely to change for some time,” analysts commented.

“Financial year 2020 guidance has been kept within the current consensus range despite the revenue uplift from higher royalties driven by VAT reduction indicating the growing degree by which the underlying business is now going backwards.”

Earnings momentum “could remain negative for some time to come” considering the proposed investment in resolving issues with franchisees.

“Shareholders may find it difficult to ratify a plan with franchisees considering that the government interventions in 2020 have boosted their underlying profitability and this makes a forthcoming deal less likely in our view,” the broker concluded.

Shares tumbled 11% to 332p on Thursday morning.

–Adds analyst comment, shares–

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