The leadership at ASX-listed Domino’s Pizza Enterprises is under increasing scrutiny as its US parent company, Domino’s Pizza Inc., and local chairman Jack Cowin become more involved in the company’s operations. The American parent company’s patience is being tested as it considers exerting greater control over the business led by CEO Don Meij.
Investors are focused on two key issues: whether a broader management overhaul is needed and whether a capital raising will be necessary due to the company’s leverage, with shares near decade lows of around $30. As of December 30, the company’s net debt (excluding leases) stood at $770 million.
Domino’s Pizza Enterprises holds the master franchise license for the brand in Australia, New Zealand, France, Germany, Belgium, the Netherlands, Denmark, and Japan. It is the largest franchisee outside the US. On July 18, Domino’s Pizza Inc. surprised Wall Street by suspending its guidance for global growth of 1,100-plus stores over 2024-28, citing underperformance in Australia. This announcement led to a 14% drop in the US parent’s share price.
Just a day earlier, the Australian arm had announced a strategic review and the closure of nearly 10% of stores in Japan and France to address poor performance. The company also revised its long-term goal of 7,100 stores by 2033, indicating it would not meet this target.
Domino’s Pizza Inc. stated it is “partnering closely with DPE as they work through this process” but did not respond to questions regarding its involvement. The US company is also facing two class action lawsuits, alleging it made false or misleading statements and failed to disclose information about its store growth target.
Domino’s in Australia was forced to cut its interim dividend in February due to struggling European operations and may have to cancel the final dividend to conserve cash. Chairman Jack Cowin, who is a major shareholder and founder of Hungry Jack’s in Australia, is reportedly unhappy with the declining share price. His 26% stake’s value has plummeted from a peak of $3.68 billion in 2021 to $681 million. Despite this, Cowin has remained supportive of Meij, even as the company faces challenges.
Cowin has become more involved in the business, attending an investor day in France and enlisting two former Burger King executives to help improve franchisee profitability and drive innovation. The pressure is now on Meij, who has returned to Brisbane from the US, to deliver a turnaround. Despite falling capital expenditure and expected earnings improvement next year, rising input prices and reduced consumer spending pose challenges.
Analyst Angus Aitken has expressed confidence in Cowin’s ability to grow businesses and views Domino’s as undervalued at $30. He suggests the company could benefit from simplifying its operations, possibly exiting less profitable markets like Cambodia and Malaysia to focus on higher-margin regions such as Australia and New Zealand.
Jefferies analysts estimate the average store franchisee EBITDA for Domino’s Pizza Enterprises was only $95,000 for the year ending March 2024, significantly lower than the COVID-19 peak and below the average US franchisee profitability. There are concerns about whether the Australian company was pressured by its US parent to open stores despite questionable store economics. The company now faces costs associated with closing unviable stores, with potential unknown financial impacts wrapped up in pending write-downs.
Despite these challenges, Citi analyst Sam Teeger maintains a buy rating on the stock with a target price of $44.50. He believes it wouldn’t take much positive news to attract market interest again, although some investors may remain cautious due to the company’s debt position, especially after a temporary increase in its debt covenant to 3.5 times leverage from three times.
In February, Cowin expressed confidence in the company’s turnaround strategies and supported Meij. However, with recent developments, the pressure is on to restore the company’s performance and share price to previous levels.
