There are many household names in the FTSE 250. However, there can be a disconnect between our perception of how well the company is doing and how the stock is performing. For example, I was amazed to see that Domino’s Pizza Group (LSE:DOM) is down 49% over the past year. Here’s what’s going on.
Reasons for the fall
After further research, the share price has struggled for several reasons. Part of it is simply down to weaker consumer demand. It referenced this back in the late summer, with CEO Andrew Rennie noting, “there’s no getting away from the fact that the market has become tougher both for us and our franchisees”.
Aside from this, there have been headaches due to higher costs, particularly labour. Recent changes in the UK, including higher national insurance contributions and similar measures, haven’t helped.
These two factors, along with others, have weighed down financial performance. It cut full-year core profit guidance earlier in the year, so the share price fell to adjust for revised expectations.
The outlook from here
The stock is now at its lowest level in over a decade. Yet there are some signs that the worst of the fall could be coming to an end. During the latest earnings call earlier this month, it said full-year underlying earnings should be between £130m and £140m. So the business is still comfortably making a profit, despite the problems.
New initiatives are being rolled out. For example, a new chicken-focused sub-brand is being trialled in hundreds of stores across the UK. If the company can diversify away from just pizza, it could provide a buffer to its finances. If this can be positioned at a lower price point, it could retain clients who normally can’t afford to order from Domino’s.
However, there are clearly many red flags. Net debt is expected to be between £280m and £300m by the end of this year. This is up from £265.5m in December 2024 and £232.8m the year before. The interest costs on this higher debt are only going to get more painful and take more cash flow away from operations.
Also, I’m not sure we’re going to be in for an easy ride with discretionary spending in the coming year. The Budget is likely to include higher taxes next week. So, I think the weak demand for Domino’s could continue, or at least not materially improve.
Slicing it up
I’m indeed surprised the share price has fallen so much in the past year. But after some research, it does make sense. I don’t see a risk of the company going bust, but I don’t see a clear catalyst right now to justify me buying. As a result, I’m going to add it to my watchlist and if it continues to fall into Q1, then I’ll consider buying it as a value purchase.
