Domino’s Pizza Enterprises faces skepticism in the market over its plans to revive its struggling operations in France and Japan, with Goldman Sachs expressing concerns about the lack of transparency and conviction in the company’s strategy.
Following a strategy day held by the ASX-listed pizza chain, Goldman Sachs brokers conveyed doubts regarding the management’s ability, led by long-serving CEO Don Meij, to outline a clear path to recovery. The bank noted a perceived reliance on further discounting and a pause in store expansion as measures to restore profitability, which failed to inspire confidence among investors.
The once-thriving Domino’s, buoyed by a surge in demand for takeaway food during the COVID-19 pandemic, has seen its shares dip below $40 amidst declining profitability abroad. On Monday, shares experienced a 4% decline to $38.58.
Key challenges for the company include a botched attempt to implement delivery surcharges to offset rising ingredient and labor costs, alongside slower-than-expected growth in pivotal overseas markets across Asia and Europe. While Domino’s has begun unveiling strategies to address these issues, including during the recent presentation, Goldman Sachs remains unconvinced that the core issues in regions like France and Japan have been sufficiently addressed.
Lisa Deng of Goldman Sachs highlighted the company’s failure to provide a thorough analysis of the challenges in these problem regions, contributing to a lack of transparency and conviction in their remedial plans. Moreover, the decision to pause new store openings means Domino’s will fall short of its outlet targets for this financial year and the next, further denting investor confidence.
In France, where Domino’s ventured in 2006, growth has stagnated for years. Similarly, in Japan, consumer spending has waned, posing challenges for the uptake of promotional offers and new menu items.
The competitive landscape in the fast-food sector adds pressure, with rivals like Guzman y Gomez and Pizza Hut aggressively pursuing market share. Analysts suggest Domino’s may even face store closures in Japan due to its overly rapid and broad geographical expansion strategy.
Despite challenges, Domino’s remains committed to expanding its footprint in Japan, aiming for 2000 stores by 2033. However, concerns persist regarding the company’s approach to profitability, including its exploration of third-party delivery services during non-peak periods, which could compromise product quality.
Investor meetings planned in Europe next month aim to provide further insight into Domino’s operations in France. However, following the recent investor day, Macquarie analysts have revised earnings forecasts downwards, citing expectations of a slower store rollout and softer margins in Asia.
With structural challenges persisting in key markets, Domino’s faces an uphill battle to regain investor confidence and steer its international operations back on track.
