Domino’s Pizza Enterprises Limited [ASX:DMP] shares fell 9% in yesterday’s trading, on news that analysts from Credit Suisse downgraded the stock from ‘neutral’ to ‘underperform’.
The fast food giant dropped $4.92 of its share value, currently trading at $48.92 — almost 16% down from its 52-week high.
Why has Domino’s share price dropped?
Yesterday’s sell-off came after reports that analysts at Credit Suisse issued a report downgrading Domino’s price target from $42.47 to $36.76, as reported by The Age.
There seems to be a few reasons behind the broker’s price downgrade, including the recent scandals involving Domino’s underperformance in their expansion into Europe and Japan, along with the rising popularity of competition.
As reported by The Age, Credit Suisse believes the investigation into the pizza chain by Fair Work, and Domino’s moving its Australian staff on to award wages in January, could cause a reduction in profitability.
The parliamentary inquiry into franchising, which could result in harsher rules for Domino’s, will also require transparency in agreements with store owners. Analysts are stating that this could take a toll on Domino’s Australian expansion plans, which is a key profit driver for the company.
The pizza chain has also been experiencing challenging conditions with its expansion into Europe and Japan, due to local cuisines gaining market share. The Age reported that Credit Suisse are projecting 1722 stores in Europe, in comparison to Domino’s guidance of 2600.
In addition, Domino’s is experiencing a significant step up in competition in the online delivery market. With the expansion of aggregators such as Menulog, UberEats and Deliveroo from inner cities to outer suburbs, making it easier for independent fast-food stores to deliver.
Analysts are also expecting slower sales in their Australian market, stating that it is unlikely that Domino’s will reach its target of 1000 new stores in Australia.
The report stated:
‘If Victoria could only sustain a 15 per cent increase in the number of stores from the present base, the growth implied by Domino’s 1000-store target for Australia would appear to be too high to be achieved from the other states alone,’ as reported by the Financial Review.
What is in store for Domino’s next?
Domino’s share price has bounced back 1.27% since opening this morning, currently trading at $49.54.
We can expect any adverse publicity, stemming from the franchising inquiry, or any sign of weakness in Domino’s store rollout in Australia to inevitably put more pressure on the share price.
The fast-food franchise is set to release its full-year results on August 14. We will just have to wait and see whether the fast-food chain can prove analysts wrong.
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