Domino's Pizza H1 earnings set to drop amid higher costs

Domino’s Pizza said on Wednesday that first-half core earnings are set to be slightly lower year-on-year due to higher costs during lockdown.

The company said it made "significant" changes to its operations in the UK and Ireland to ensure safe trading during lockdown, and the costs incurred to make the changes "have more than offset the benefits from the increased sales" it achieved over the period.

As a result, first-half earnings before interest, tax, depreciation and amortisation will be a little lower than last year.

Domino's, which remains unable to provide guidance for the full year, said UK like-for-like sales rose 3.7% between 31 December 2019 and 14 June 2020. This was driven by increased order count and growth in average ticket size.

However, Domino’s noted a change in consumer purchasing behaviour and average basket composition, with a higher proportion of sides and desserts, which has impacted its margins.

The performance in Ireland was weaker against a strong comparative last year, with LFL sales down 5.9%. "We believe that wider consumer spending weakness due to the Covid-19 lockdown has been more pronounced in Ireland," it said.

Chief executive officer Dominic Paul said: "I am proud of the performance of our system during this period, and that the vast majority of our stores have remained open. I am looking forward to giving a more detailed update on our performance and sharing my first impressions of the business at our first half results presentation in August."

Russ Mould, investment director at AJ Bell, said investors had been bidding up the shares in April and May in the belief that households stuck in lockdown would turn to well-known brands such as Domino’s for takeaways, partially as a bit of treat to relieve the boredom of being stuck at home and not enjoying restaurants or pubs.

"While its sales have gone up during the lockdown period, the types of products being bought aren’t necessarily the most profitable ones for Domino’s. It says a lot more people have been buying sides and desserts which are lower margin, thus earnings are likely to be lower than analysts had been forecasting," he said.

"Pizza has long been a favourite of restaurant and food operators because the profit margins on a bit of cooked dough with sprinklings of cheese and a dash of tomato sauce on the top are significantly higher than many other popular meals.

"Selling desserts and sides such as chicken wings provide a nice boost to earnings but at the end of the day Domino’s would rather customers spend more money on pizzas because it leaves more money in its pocket after costs.

"Pizzas can be bought for a fraction of the price in supermarkets and so any pressure on people’s wallets could seem them turn their back on Domino’s if times become hard financially."