Domino's Pizza shares look as appetising as a soggy margherita at the moment after the takeaway specialist reported a slowdown in sales growth, with analysts suggesting the cost of its food could be putting off cash strapped consumers.
It said like for like sales in the first quarter rose by 3.5%, helped by a recovery in Ireland, but this was down from 4.2% in the same period in 2011 and compares to 3.7% for the first seven weeks of 2012. Its online business continues to grow, now accounting for 50.6% of all deliveries, up from 39.3%.
The company said it was sticking with plans to open 72 new stores in 2012, but so far this year has opened only 6. Chief executive Lance Batchelor, who took up the role last year, said the company would not be taking its foot off the accelerator:
We have a number of marketing initiatives and other programmes aimed at ensuring our franchisees can profitably grow their businesses in the coming months. This, combined with a full pipeline of potential new sites, expansion in Germany, a strong management team in place and our ever improving operational gearing, makes me confident and optimistic about the months and years ahead.
The City was less confident and optimistic. The company's shares are down 26.4p at 445.1p - a near 6% decline - and Panmure Gordon analyst Simon French issued a sell note with a 350p price target.
Patrick Coffey at Liberum Capital also advised investors to sell. He said:
The investment case is predicated on key performance indicators moving the right way. But the KPIs are not improving and customers are ordering less frequently. It appears that demand may not be growing as fast as supply. Our propriety consumer survey shows value is the most important metric for Domino's customers. Like for likes are now being driven by price, not volume. But constant price rises are unsustainable. We do not believe the
market has priced in the risks of greater rebates from the PLC to franchisees in 2012.
Paul Hickman at Peel Hunt was less negative, keeping his hold recommendation:
Domino's is showing good underlying progress and has strong prospects in the second quarter and the Olympic period. An increase in openings is the most direct way for the company to bridge the gap between medium-term prospects and short-term earnings. Nevertheless, we expect the effect of any increase to affect 2013 more than 2012. Until short term earnings growth actually starts to accelerate earnings growth beyond low teens, we believe that the 2012 forecast PE of 22 times is high enough.
